Pension transfer & IHT liability
Where a client dies within two years of a pension transfer there can be ramifications for the SIPP operator as well as the financial advice firm, points out Sean Donald, paraplanner with The TimeBank
Where a member of a pension scheme makes a pension transfer whilst knowing that he or she is in ill health, and then dies within two years of the transfer, HMRC takes the view that a chargeable lifetime transfer (CLT) can arise. This is particularly pertinent at the minute, given the number of clients transferring into SIPPs to access Flexible Access Drawdown under the Pension Freedoms legislation.
If there are no beneficiaries to pay the IHT and the transfer was to a SIPP, in certain cases, the SIPP may be liable for the IHT. With this in mind, the scheme administrators of SIPPS are interested in ways in which they can avoid any potential risks that they may be exposed to when a client in ill health makes a transfer and dies within that two-year period. There are a number of possibilities.
• Obtain a declaration from the financial adviser to confirm they have considered the IHT implications of the transfer (particularly if the client knows they are in ill health), get the adviser to accept responsibility for this and confirm that if a chargeable transfer is treated as arising, the client’s estate would have funds to meet any IHT liability.
• Obtain a declaration directly from the prospective transferor that they are not aware of any condition that has been diagnosed that could cause their death within two years. If it transpires that the member dies within two years of the transfer and the death certificate indicated the cause of death was such it was likely the individual was suffering from the illness that caused the death and he/she were likely to have known about it, at the time of the transfer, the scheme administrator might decide to pay all death benefits into the deceased’s estate. However, that could leave them open to challenge from the beneficiaries that the trustees were not discharging their duties with due diligence.
• Scheme administrators should ensure their literature highlights the potential for IHT both on pension transfers when the individual is in poor health and doesn’t survive two years, but also in respect of large pension contributions paid when the member is in poor health and then dies within two years.
• For larger transfer values, it may be appropriate to consider that advisers obtain a PMAR for all potential transferors and this is provided to the scheme administrator. This should satisfy the scheme administrator (and if necessary, HMRC) that the individual was not knowingly in poor health at the time of the transfer.
Based upon the HMRC approach in recent cases, there could well be other instances where HMRC look to a scheme administrator to pay the IHT. This course of action may be triggered by HMRC seeing the cause of death on the deceased’s death certificate. They may decide they need more time to look into matters, but it is important to remember there is still the requirement for death benefits from uncrystallised funds, on death prior to age 75, to be paid out within “the relevant two-year period” to avoid them becoming subject to income tax. This may curtail their ability to clarify matters.
Potential for IHT
As a result, it is important that financial advisers understand the potential for IHT on pension plans and the circumstances when it can occur. They should:
• Clearly document the risks to clients as a part of the switch/transfer recommendation
• Have an open and frank discussion with clients about their health.
What happens with transfers for an individual who is aware they are in poor health and are unlikely to survive the requisite two years? For example, people may be in a position where they have to transfer to be able to access their (or their beneficiaries) benefits flexibly. In such cases what options are open to them?
Remember, that many schemes will offer 100% commutation, on the grounds of serious ill-health, pre age 75 i.e. a life expectancy of less than 12 months. If someone is so seriously ill, then commuting the benefits so they are in the estate, means they can be passed on to the surviving spouse/civil partner free of tax.
There has been more than sufficient coverage in the press and with court cases over the last 10 years or so, for there to be no excuse for financial advisers knowing there is the potential for IHT on pension transfers when an individual undertakes a pension transfer knowing they are in poor health and the individual then dies within two years.
If an IHT liability results, or the transfer causes the member’s nil rate band to not be available or fully available on their death, there seems little point in blaming the pension scheme administrator. The fault must rest with the adviser. Should a complaint be made in circumstances such as these, it will be interesting to see how the outcome will be determined.
In summary, advisers should make sure that they have this conversation with clients looking to transfer their pension funds and clearly document the health on the factfind and confirm in the suitability letter along with highlighting the potential risks of IHT arising on death within the two-year period.
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