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PENSION REFORM 2014/15

Synopsis: 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.

Date posted: Friday, May 01, 2015

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).

These facts mean that in theory making unrelieved contributions to build up a pension pot purely as an IHT fund should work. However, there are several issues to consider before adopting what looks like an aggressive approach to estate planning:

  • On death before age 75, a lifetime allowance charge under BCE 5C, BCE 5D or BCE 7 could arise.
  • On survival to age 75 a BCE 5B would still have to be negotiated.
  • Individual contributions are only exempt from treatment as transfers of value for IHT purposes if they are or, were it not for insufficiency of income, would be relievable (s12(1) IHTA 1984). As contributions made after age 75 are excluded from relief (s188 (3)(a) Finance Act 2004), they are not covered by this exemption.
  • Finding a provider that will accept payment of personal contributions above the tax relievable limits and/or contributions beyond age 75 is not easy. Most providers do not want to become involved in such issues. The client declaration on the typical application form will be on the basis that the total payments to any registered pension scheme, in respect of which relief under section 188 of the Finance Act 2004 is available will not exceed the higher of £3,600 or individual’s relevant UK earnings.
  • The General Anti-Avoidance Rule (GAAR) could be hauled into use if HMRC wanted to play hard ball. The GAAR provisions say (FA 2013 say (s207(2)):

‘Tax arrangements are ‘abusive’ if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including—

(a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions,

(b) whether the means of achieving those results involves one or more contrived or abnormal steps, and

(c) whether the arrangements are intended to exploit any shortcomings in those provisions.’

Making unrelieved pension contributions for IHT planning reasons could be open to a challenge as something that ‘…cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions’.

COMMENT: 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.

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