Sons must pay inheritance tax on mother's pension fund
The Supreme Court has ruled that a woman’s sons will have to pay inheritance tax on her pension fund because she had not drawn upon it during her lifetime.
The court heard evidence that the deceased woman and her former husband had been directors of a company. Shortly before her death, she transferred funds from her company pension scheme into a personal pension plan, nominating her sons as the beneficiaries in relation to the death benefits.
She did not take any pension benefits during her lifetime, so when she died the whole of her personal pension fund was uncrystallised.
HMRC determined that inheritance tax was due on the death benefits on the basis that the transfer and the omission to draw lifetime benefits were "transfers of value" within the meaning of the Inheritance Tax Act 1984.
The executors argued that because the deceased's sole purpose in making the transfer had been to prevent the pension fund from reverting to the company, she had not intended to confer a gratuitous benefit on anyone, and the death benefits therefore were not chargeable to inheritance tax.
The case went all the way to the Supreme Court which ruled that standing alone, the transfer was not a transfer of value under the Act.
However, the deceased's estate had been diminished by her omission to take lifetime benefits, and her sons received the resulting death benefits.
There was a sufficient connection between the omission and the increase in value of the sons' estates to satisfy the requirements of the Act that inheritance tax would be payable.
Please contact Jamiel Zaman or Lisa McBreaty if you would like more information about the issues raised in this article or any aspect of wills and inheritance tax planning.