Pension for IHT?

May 12th, 2015

The newly generous treatment of pension death benefits are prompting some creative ideas about the use of pensions in estate planning. Whether they could be applied in practice is open to question.

The changes to the tax treatment of pension scheme death benefits that came into effect on 6 April 2015 are undoubtedly generous, although as we have remarked before, it should not be forgotten that most people will survive beyond age 75, at which point the greatest tax breaks disappear.

The generosity of those reforms has meant pension arrangements are increasingly being viewed as estate planning vehicles rather than as a means of providing retirement benefits. Although the Pensions Minister is on record as saying “we don’t want pensions to become a vehicle for inheritance tax planning”, we are now hearing suggestions that:

  • Contributions should be made beyond the levels at which tax relief is available; and
  • Age 75 should not be regarded as a barrier to personal contributions.

At first sight both these points may look wrong, but the legislation is clear:

  • In terms of contributions, the Finance Act 2004 does not impose any limits. What it does do is restrict the amount that qualifies for tax relief and levies an annual allowance charge (which is strictly a separate tax charge, not a reduction in contribution relief). Ultimately there is also the lifetime allowance to consider as a further constraint.
  • The age 75 ceiling is similarly only about relief on personal contributions: there is nothing that says contributions cannot be made. In any case there is no age 75 restriction in respect of employer relief for their contributions, provided they can pass the usual “wholly and exclusively” rule. The 75+ employee is not liable to tax on the employer contribution, but if it is large enough there would be an annual allowance charge (no such charge can apply to member contributions).

 

As things stand, there is nothing in statute which clearly prevents unrelieved pension contributions being made for IHT planning purposes. However, in practice such action could provoke an HMRC response. Similarly the possibility of future changes to legislation cannot be ignored.