In a recent case, the executors of a woman's estate have been ruled to be liable for Inheritance Tax (IHT) on the value of her pension fund, after she failed to take her pension when she was terminally ill.
The woman was diagnosed with cancer five months before her 60th birthday, the normal retirement date for her pension. She took no action at all in relation to taking the pension, although she received the usual pre-retirement options pack. Evidence was produced that she did not consider herself to be critically ill at her normal retirement date and that she had sufficient savings to make taking the pension unnecessary. She died ten months after she became entitled to the pension.
The pension policy commenced when the woman was 53 years old and it was set up from its commencement so that, in the event that she died before taking it, its value was to be passed into a trust for her beneficiaries. This is a common IHT planning device, which has been used to keep pension assets outside the IHT net.
The woman’s executors attempted to pass the value of the pension to her beneficiaries outside the estate, but HM Revenue and Customs (HMRC) argued that by not taking the pension, she had made a ‘transfer of value’ to the beneficiaries. The First Tier Tax Tribunal accepted HMRC’s argument that she had made a transfer of value because there had been a ‘disposition…which resulted in a loss of value’ to her estate. They argued that the three criteria for a disposition being made had been met, as follows:
- There was a deliberate omission to exercise a right;
- This resulted in the value of the disponor’s estate being diminished; and
- The omission led to the value of another person’s estate or settled property becoming increased in value.
In his discussion of the applicable law, the judge commented that when dealing with acts of omission, the section of the Inheritance Act 1984 that reads ‘unless it is shown that the omission was not deliberate’ means that ‘an omission is to be treated as deliberate unless it can be shown not to have been deliberate’. In other words, the burden of proof that the woman’s omission to take the pension was not deliberate fell on her executors. As they were unable to demonstrate this, the value of the pension became part of her estate for tax purposes.