Estate Planning Guide

Pension planning Pension pot Non-pension funds <75 no IHT >75 IT at marginal rate BENEFICIARY INHERITS MEMBER SPEND ON LIVING State pensions, savings, etc IHT at 40% 24 ESTATE PLANNING OPTIONS 25 ESTATE PLANNING OPTIONS Contributions to a pension scheme are not usually lifetime transfers of value for the purposes of IHT and will be immediately excluded from the member’s estate, unless: Contributions to a pension scheme and lifetime transfers of value A) The death benefits from the pension are outside of the estate. If the contributions are made while the member is in good health there will be no transfer of value but if made while the member is in ill health there may be a transfer of value. So, where the member is likely to survive to take their retirement benefits then the payments are for their benefit so are not transfers of value. It is accepted practice that contributions made more than two years prior to death are not transfers of value. B) A contribution is made to someone else’s pension, as the benefit will be for another. These would be a lifetime transfer of value. For IHT purposes they would either be exempt, possibly under the annual exemption or normal expenditure out of income rules, or PET if the contributor survived for seven years following the date of the contribution. PENSION PLANNING OPPORTUNITIES The latest amendments to pension legislation position pensions as a potential estate planning vehicle. Contributions to a pension arrangement held under trust made from income offer potential for funds to be immediately held outside of the estate. Pensions also offer the additional benefits that personal contributions will continue to attract IT relief at the contributor’s marginal rate and will enable capital and income returns to accrue tax free. Defined Contribution scheme members can bequeath any remaining pension fund, whether it is uncrystallised or in drawdown to anyone they nominate and where the member died before the age of 75, the IHT free (IT at the marginal rate of the inheritor is due if the member is over 75 on death). It is also available as a lump sum, a regular income or both. This creates an interesting planning solution – where it is advantageous for a potential beneficiary to pay IT at their marginal rate rather than IHT on an inheritance, a pensioner may choose to use sources other than their pension to fund their living costs. As a result, the value of assets outside of their pension and to which IHT would apply, will reduce while those protected from IHT within the pension, although potentially subject to IT, will be maintained. That said, the new freedoms to bequeath pension fund death benefits do not apply to members of Defined Benefit arrangements. Death benefits under these arrangements continue to be subject to the relevant pension scheme rules. As a result, all transfers out of Defined Benefit schemes are regulated by the Financial Conduct Authority, with the intention of discouraging ill-conceived attempts to access additional pension freedoms. The rules include that any pensioner considering such a transfer must take advice from an adviser who holds a specialist pension transfer qualification and pension scheme trustees must also verify that this advice has been taken before any transfer is made. Pensions as settled property Pensions and annuity arrangements are settlements for IHT purposes. However, pensions and annuity arrangements are exempt from the normal IHT charges that apply at the point of settlement, every 10 years and on exit (as is the case when assets are settled into trust). This is subject to the scheme paying out any death benefits within two years of the member’s death. If this is not the case, the periodic and exit charges may become payable. Consequences of a SIPP investing in taxable property Where a SIPP invests in taxable property, then the SIPP is deemed to own that taxable property and will be taxed accordingly. If the SIPP does not own the whole taxable property then it will be taxed accordingly on a pro rata basis. • There is an initial tax charge of 40% on the policyholder and a 15% tax charge on the SIPP. If the taxable property forms more than 25% of the value of the SIPP then there is a further tax charge of 15% levied on the policyholder. • Ongoing tax charges will also apply. The SIPP will incur a charge of 40% on the income, or deemed income if there is none, and 40% on any gain on disposal. The consequences of owning taxable property occur in a number of circumstances and in some cases when you might not expect it. For example, a SIPP owns 20% of an unquoted company, which in turn buys a work of art worth £20,000. The SIPP is treated as acquiring £4,000 worth of taxable property. As the asset is worth more than £6,000 the asset will trigger an initial tax charge on the value of £4,000 and ongoing tax charges on the deemed income. With IHT receipts expected to rise to £6.5 billion by 2023 according to the OBR, estate planning is becoming an important issue for an increasing number of people. SAM MCARTHUR, CHIEF OPERATING OFFICER, PUMA INVESTMENTS