You can’t take it with you

Right, as we are still (as of 5th May) deep into election territory, this weeks little homily is again covering some real law.

This one comes courtesy of the First Tier Tax Tribunal and concerns the case of Fryer and Ors v HMRC and which seems to be saying that if you don’t take your pension when it is due to you, then you (or your estate) will be liable to Inheritence Tax – a situation that most practioners thought the tax man wouldn’t claim.

The facts simply put are that Ms Fryer had set up a discretionary trust into which all the benefits of her pension scheme were to be paid. The scheme allowed her to take her benefits at any time between the ages of 50 and 75 – a very common situation (although since 6 April 2010 the minimum age has risen to 55). If she died before taking her benefits, all the monies passed into the trust.

Sadly for Ms F, she died aged 61 without having put her pension scheme benefits into payment. HMRC argued that since her normal retirement date under the Plan was 60 the benefits ‘vested’ for tax purposes at that age and thus became liable to IHT from that time. The problem was that since the early 1990’s HMRC had made a statement that it wouldn’t seek to apply IHT on the overwhelming majority of deferred pension funds and in particular where the member survived for at least 2 years after the decision to defer.

But now the goalposts seem to have moved to cover all instances where someone could take their pension benefits but for whatever reason, chooses not to as HMRC now views this as an attempt to ‘deliberately’ avoid taking benefits and thus being in receipt of income which would otherwise be taxed. A mere omission to take a decision has become deliberate tax avoidance.

This could have wide implications for those who may have chosen not to take their benefits at the NRD of their scheme and will be yet another nail in the coffin of pension provision just at the very time when we should be encouraging saving.

If someone was in the lucky position not to have to call on their pension benefits to live and so put off the fateful day, only to die before doing so, it seems somewhat rough justice that executors may now face a hefty tax bill as a consequence, and even penalties for underpayment of something they didn’t realise was payable.

This decision may be appealed of course and I for one sincerely hope it is.