The Tax Tribunal has dismissed an appeal by the executors of a deferred pensioner against liability to inheritance tax (IHT) on undrawn retirement benefits.
The deceased could have taken a lump sum and an annuity from her personal pension at any time between 50 and 75 but had deferred taking her benefits, knowing that she had terminal cancer. On her death, the fund was held on discretionary trusts for family members in accordance with the plan rules. Had she drawn her benefits then the lump sum and any guaranteed annuity payments would have formed part of her estate on death and been subject to IHT.
The tribunal held that the member’s failure to exercise the right to take her pension benefits diminished the value of her estate and amounted to a “transfer of value” under s3(3) of the Inheritance Tax Act 1984. The tribunal concluded that her continuing omission to opt for her retirement benefits after she had become aware of her diagnosis meant that the value of her right to opt for those benefits was lost to her estate and therefore subject to IHT.
Previously we had understood that HMRC would seek to recover IHT only if they considered that a person had deliberately deprived himself of income in order to keep a pension fund outside his estate. In this case, it was argued that the deceased did not exercise the right because she did not need the income from the pension rather than deliberately depriving herself of it. That argument was unsuccessful.
While this decision is perhaps not entirely surprising, it raises the question whether it will embolden HMRC to extend the circumstances in which it imposes an IHT charge in relation to undrawn pension benefits.
The full decision can be found here