Where a person in serious ill health makes a transfer of a pension plan this can, in certain cases, lead to a chargeable lifetime transfer for IHT purposes. However, for those aged 55 or over, special rules apply to quantify the size of the chargeable transfer.

In cases where an individual transfers from one pension scheme to another and dies within 2 years of the transfer, HMRC takes the view that, in certain cases, the pension transfer may have given rise to a lifetime transfer for IHT purposes.

In essence, this could be a problem where:-

  • the individual dies within 2 years of making the transfer
  • at the time of transfer, the member knew he/she was in serious ill health and
  • it is not possible to demonstrate that, in making the transfer, the scheme member had no donative intent to others


If it is possible to show that there was no donative intent, the defence in section 10 IHTA 1984 will apply (no intention to confer a gratuitous benefit). This, for example, would be the case if the member was clearly only acting for himself and so immediately encashed the plan following transfer or had in place a plan for a regular systematic encashment.  The Staveley case (on which we understood HMRC intend to make an appeal) is an indication of HMRC’s resolve to only allow the section 10 defence in very specific cases.

HMRC will collect information on “vulnerable” pension transfers via the form IHT 409 – the pensions supplement to the Estate Return on death (IHT 400).  Not everyone will complete an IHT 400. For less complicated estates, which are termed “Excepted Estates” (assets of less than £1 million which pass mainly to a spouse/civil partner or charity), the legal personal representatives (LPRS) can complete the short form IHT 205.  However, if an “offending” pension transfer is involved, the LPRs will need to switch over to using the longer form IHT 400.

For people who transfer at an age when they can draw benefits, the process for calculating the IHT transfer of value has, in the past, been complex.  This involved determining the value of the pension scheme rights that the scheme member has the ability to give away and deducting the value of retained rights to which he/she is entitled immediately before death.  This would typically be the right to the PCLS and the present value of any guaranteed annuity.  Assumptions need to be made for future investment growth and the discount issues that arise with the purchase of such a financial product for notional purchasers.

Fortunately, the days of some of these complications may now be numbered.

In cases where an individual transfers to a pension plan that offers flexible access and that individual is aged 55 or over, we understand that HMRC will now be open to a valuation of retained rights on flexi-access principles. So, for example, the retained rights of an individual will be the entitlement to the PCLS and the residual encashment of the balance of the fund after income tax.  This will, we believe, considerably reduce the likely transfer of value in many of these cases and so, even if clients are caught, transfers of value are more likely to fall within the available nil rate band.

Example – Oliver

Oliver aged 61 makes a pension transfer with a CETV of £1 million.  At the time he makes the transfer he knows that he is suffering from pancreatic cancer and he has a life expectancy of one year.  He unfortunately dies 8 months later having not encashed any of his pension fund.

Oliver’s LPRS will need to report the transfer in Boxes 17-21 of the form IHT 409.  It is extremely likely that HMRC will take the view that an IHT transfer of value arose when Oliver made the pension transfer.

Let’s say that the value of rights before the transfer (taking account of assumed investment growth and appropriately discounted) that is agreed is £950,000.

The net transfer of value will need to take account of retained benefits.  On the basis that Oliver had other taxable income on his death of £100,000 these would be calculated as follows:


PCLS £250,000
Remaining fund £750,000
Tax £335,000
Value of retained rights £665,000


The transfer of value for IHT purposes will therefore be £285,000 (£950,000 less £665,000).  Indeed, as this is a chargeable lifetime transfer (CLT), annual exemptions of up to £6,000 may be available to reduce the value of the CLT still further.

If Oliver had predeceased his wife and had not made any CLTs/failed PETs in the last 7 years, all of this notional chargeable lifetime transfer will fall within his nil rate band and so no immediate IHT will be payable.  It will, however, mean that there will be less of a transferable nil rate band available for his widow.

Of course, in the old days the value of retained benefits could, in appropriate cases, be treated as a lifetime transfer of value immediately before death under the “omission to exercise a right rule” in section 3(3) IHT Act 1984.  As regards uncrystallised pension rights that rule was abolished by amendments to the IHT legislation in the Finance Act 2011.  Furthermore, it no longer applies to crystallised pension rights following changes made in the Finance Act 2016.


The August borrowing numbers showed a smaller than expected deficit for the month, after July’s surplus. It is a one more small piece of good news for the Chancellor ahead of 22 November and the first Autumn Budget of this millennium.

At the time of the March 2017 Budget, borrowing (PSNB) for 2017/18 was forecast to be £58.3bn, 13% up from its then estimate of £51.7bn for 2016/17. The borrowing figures for August have just been released, giving us a snapshot of the first five months of this financial year. The picture – at this stage – is better than most pundits had predicted.

First off, there has been another revision for the last fiscal year. The latest estimate for 2016/17 PSNB is £45.6bn, a £0.5bn increase on July’s calculation, but still £6.1bn below the OBR’s March 2017 estimate. The 2016/17 deficit estimate had been coming down each month because of recalculations of receipts (generally up) and expenditure (generally down). The latest estimate, reflects small upward revisions to central and local government expenditure according to the OBR commentary on the ONS data.

For now, the OBR is standing by its Budget estimate for 2017/18, as it expects self-assessment receipts to suffer (relatively) in January 2018 because of the surge in January 2017 that stemmed from dividend payments made in 2015/16 to avoid the tax reforms.

The borrowing figures for the month of August alone revealed a deficit of £5.7bn against a deficit of £7.0bn last year and market expectations of a deficit of about the 2016/17 level. Self-assessment receipts were down markedly on a year ago, but this was probably due to calendar factors, as 31 July was a Sunday in 2016, which meant some payments moved into Monday and August. Across July and August, self-assessment receipts rose by 4.4% over 2016/17. The lower August 2017 self-assessment receipts were countered by buoyant PAYE, NICs and VAT income.

For the first five months of 2017/18 PSNB amounted to £28.3bn, down £0.2bn on 2016/17. If the borrowing pattern follows the 2016/17 experience, that suggests an outturn for 2017/18 very similar to 2016/17 at about £45bn. The anticipated fall in self-assessment receipts mentioned above means that last year’s pattern will not be repeated. However, five months into the financial year, the overall pattern points to the Chancellor having perhaps £10bn to play with by next March, compared with the original Budget projections.

As we said last month, these borrowing numbers give the Chancellor some wriggle room heading towards his Autumn Budget.


The case In the matter of the A Limited Furbs and the B EBT [2017] 21/2017, decided in the Guernsey Royal Court provides clarification on when offshore trustees may have to comply with a request from a UK Court to disclose information about the trust.

We have recently considered the rights of beneficiaries to trust information. In some cases, even a person who is not a beneficiary under a trust may seek disclosure of trust information – this will frequently be the case in matrimonial (divorce) proceedings where one of the spouses has set up a trust which they prefer not to disclose to the other. The situation is even more complicated where the assets and trustees are offshore.

As a general rule, where a beneficiary of a trust is a party to divorce proceedings, the Courts will have regard to the financial resources of the beneficiary, and any interest under a trust or settlement is regarded as a financial resource.

The basic principle is that a beneficiary’s interest under a trust can be relevant in divorce proceedings if either the beneficiary has a vested right to trust assets and/or income, or the trustees operate in any way consistent with the conclusion that, as a matter of fact, they treat the trust assets as the beneficiary’s and use them for his or her benefit. This is true regardless of the nature of the trust assets.

What if the divorcing party refuses to disclose the nature of their interests under a trust?

Well, the Court has a power to demand information about trust assets and if the trustees receive a Court order they have no option but to comply. However, what happens if the trust is an offshore trust? Will offshore trustees be obliged to submit to the jurisdiction of UK Courts?

The recent case, In the matter of the A Limited Furbs and the B EBT [2017] 21/2017, decided in the Guernsey Royal Court, provides helpful clarification on this matter.

The general approach in the Channel Islands so far has been that trustees of a discretionary trust should normally resist submission to the jurisdiction of a foreign court. In this case, however, the Court decided that in certain circumstances (for example where the trustee has limited discretion, such as in this case) submission may be appropriate to assist the foreign Court although trustees should be encouraged to apply to their “home” Court for directions before deciding whether to submit to the jurisdiction of an overseas Court.

Accordingly, the judge sanctioned the trustee’s submission to the jurisdiction of the English Court in the underlying divorce proceedings. The facts of the case are interesting as the circumstances, involving funds accumulated in an offshore FURB, are probably not unusual.

Background to the case

The case arose during the course of divorce proceedings in the English Court. The wife sought to join the trustee of a Guernsey trust (the “FURBS“) in the divorce proceedings in England for the purposes of disclosure; she wanted to know what assets were held on trust. She obtained a Court order from the High Court in England against the trustee of the FURBS.

On receipt of the order, the trustee made an application to the Guernsey (i.e. its “home”) Court for directions on whether or not to submit to the jurisdiction of the English Court. It did this because Guernsey law contains so-called “firewall provisions” which confer exclusive jurisdiction on the Royal Court in relation to matters of Guernsey trusts under the Trusts (Guernsey) Law 2007.

The FURBS held substantial assets, including a number of properties used by the divorcing couple. The whole of the trust fund was held under the terms of the FURBS for the husband as the sole member of the FURBS.

Relevant case law

The Guernsey Judge reviewed the relevant case law under Jersey law as there had been no prior cases on this point in Guernsey.

In the case In the matter of the H Trust [2006] JRC 057, which involved a discretionary trust, a couple divorcing in England were among the beneficiaries and the wife obtained an order joining the trustee to the English proceedings.

The trustee sought directions from the Jersey Royal Court which decided that the roles of the two Courts (i.e. the English and the Jersey Courts) are very different; the English Court being concerned to do justice between the two spouses while the role of the Jersey Court was to consider and approve decisions in the interests of all the trust beneficiaries.  Accordingly, the Jersey Court decided against submission to English jurisdiction.

The decision also indicated that if a trustee were to submit to the jurisdiction of the foreign Court, it would lose the protection of the firewall provisions under Jersey law. This happened in another case, In the matter of the A and B Trusts 2007 JLR 444, where the trustee intervened in proceedings in the English High Court without first seeking directions from the Jersey Court. It then sought approval from the Jersey Court regarding its ongoing participation in the matrimonial proceedings. The Jersey Court refused to make the order sought. Submission to the jurisdiction of the English Court meant that there was scope for full disclosure in respect of the trusts concerned to be ordered in the proceedings and the loss of the protection provided by the Jersey firewall legislation.

The Guernsey decision

Despite the Jersey cases pointing away from a trustee submitting to the jurisdiction of an overseas Court, the Guernsey judge considered that the nature of the FURBS was such that its trustee was in a different position from the trustee of a discretionary trust. Had the trust in question been a “standard” family discretionary trust with a class of beneficiaries extending beyond the divorcing couple, the judge said he would probably have followed the reasoning in H Trust and concluded that it was best for the trustee not to submit to the jurisdiction of the English Court.

However, the judge found that, on reading of the FURBS trust instrument, the trustee had no discretion to exercise – all it was required to do is to make arrangements to pay a pension to the husband or, if the husband so elected, to provide him with a lump sum.   The judge concluded that this was one of those exceptional cases where submission to the jurisdiction of the foreign Court was permissible and appropriate and therefore sanctioned the trustee’s submission to the jurisdiction of the English Court.

The nature of the trust clearly made all the difference.

The subject of offshore trusts is timely given the changes to non-domicile taxation and so we will come back to this topic again. Meanwhile, the issues outlined above should be borne in mind when advising clients on trust issues which have an offshore aspect.


FCA launches service which is intended to help new entrants to the market navigate the complicated web of regulation.

Following publication of its final report into the asset management sector, the Financial Conduct Authority (FCA) has launched a service which will help asset management businesses get authorised.

The hub, which is expected to launch next month, is intended to help new entrants to the market navigate the complicated web of regulation.

‘We know some of those businesses find it difficult to navigate regulation,’ said Megan Butler, executive director of supervision – investment, wholesale and specialist at the FCA.

Last year the regulator approved the launch of 204 investment firms.

The hub will offer start-ups pre-application meetings and dedicated case officers, as well as a ‘user friendly’ web portal.

The launch follows the successful launch of a similar project at the Prudential Regulation Authority for banking start-ups.


As is well known, in the case of a member of a pension scheme dying aged 75 or over and a lump sum being paid to a personal discretionary/flexible trust (such as a by-pass trust), a 45% SLSDBC income tax charge will arise. On later payment of some or all of this amount to a beneficiary, the beneficiary will be taxed on the grossed-up amount but be entitled to a credit for tax previously suffered by the trustees.

Two issues arise out of this:-

  • Where the individual has a tax liability on other income that is less than the tax credit on the payment out of the trust, can the excess tax suffered be recovered from HMRC?
  • Where a payment is made out of a trust to a beneficiary, how is that payment attributed to the earlier lump sum payment from the pension scheme? This will be relevant where the lump sum has grown in value or other payments have also been made to the trust.


We now address these issues in more detail.

  • Reclaiming the 45% tax deduction


Section 21 Finance Act (No. 2) 2015 amended section 206 of the Finance Act 2004 to deal with cases where a lump sum is paid to a non-qualifying person (such as trustees) from a registered pension scheme and that lump sum attracts a 45% tax charge, and a subsequent payment is made to a beneficiary. It provides as follows:-

the amount received by the beneficiary, together with so much of the tax charged under this section on the lump sum as is attributable to the amount received by the beneficiary, is income of the beneficiary for income tax purposes but the beneficiary may claim to deduct that much of that tax from the income tax charged on the beneficiary’s total income for the tax year in which the payment is made to the beneficiary.’

Further explanation on the interpretation of this section is given in part 3 of Pension Flexibility in Pension Schemes Newsletter 77. Here it states that:

 ‘the individual will be able to set off the tax paid on the lump sum death benefit by the Scheme Administrator (or a proportion of it, where the trust payment is funded by only part of the lump sum death benefit the trustees received) against the tax due on this trust payment. This may lead to a refund of tax.’

Does this mean that the payment (grossed up by 45%) from the trust will be treated as part of the individual’s total income for that year so that some of the deemed 45% tax payment would be recoverable if the individual does not pay tax at 45% on all of the payment from the trust and the tax on other income in that year? Or is any tax that is “recoverable” limited to the tax the individual pays on other income in that tax year?

Let’s take an example. Assume that in 2017/18 an individual has other taxable income of £10,000 on which he has a £2,000 tax charge. Say he receives £10,000 from a pension scheme trust on which the 45% SLSDBC had been paid on receipt by the trustees.

The £10,000 is treated as a grossed-up payment of £18,182 to the individual and so is treated as having suffered tax of £8,182.

The individual’s actual tax bill on the grossed-up £18,182 is £3,636. Therefore, there is overpaid tax of £4,546.

The question is:-

  • can he offset £2,000 of this £4,546 against the tax on his other income and the balance, £2,546 against the deemed tax paid on the distribution from the trust? This would mean he could recover £4,546 (assuming he has already settled the £2,000 basic rate tax charge on the other income) or
  • can he only offset £2,000 of £4,546 against the tax paid on the other income in that tax year?


HMRC has confirmed to us that section 206(8) Finance Act 2004 requires the beneficiary to include both the lump sum received and the tax attributable as pension income – so both elements are part of total income. On the basis that the individual would declare £18,182 as pension income and tax previously paid of £8,182, there is no requirement that any resulting overpayment of tax should be restricted and therefore, in the above example, it would be possible to obtain a repayment of tax of the full £4,546 (assuming the tax on the other income had been paid).

  • Attribution of payments made to beneficiaries


In what way is any payment made to a beneficiary attributed to the original payment from the Scheme Administrator to the trustees?

For example, say a member died aged 76 and lump sum death benefits of £100,000 were payable. If these were paid to the trustees of a personal trust, the Scheme Administrator would deduct tax of £45,000 and pay that to HMRC leaving them with £55,000 to pay to the trustees. Let’s say the trustees invested the £55,000 and after 5 years the trust fund is worth £85,000, having enjoyed capital growth and accumulated income. The trustees then make a capital distribution of £10,000 to a beneficiary. How much of that payment is attributed to the original £55,000 payment?

It would seem to us that there are 2 possibilities, as follows:-

  • The whole of the payment to the beneficiary is attributed to the original payment to the trustees. So, in this case, the beneficiary would be treated as having received a grossed-up payment of £18,182 on which tax of £8,182 had been suffered. This would give the beneficiary a tax credit of £8,182.
  • A proportionate part of the payment to the beneficiary is attributed to the original payment to the trustees and a part to capital growth.


So, in this situation £6,471 (55/85 of £10,000) would be treated as being attributable to the original payment with £3,529 representing the capital growth.  This would give the beneficiary a tax credit of £5,294 on the overall payment.

In this case, HMRC has confirmed to us that it is up to the trustees to decide how to attribute the lump sum death benefit to beneficiaries within the trust rules. Section 206(8)(b) Finance Act 2004 states that payment of any part of that lump sum received by the beneficiary is treated as pension income. The treatment therefore can apply only to the part of any payment attributable to that original amount of lump sum or, it seems, the whole payment. The trustees can make this decision.

If you would like to know more about further financial planning services we can offer please e mail or call us to discuss:

London      020 7871 5387

Brighton       01273 457100

Horsham      01403 333666


Query Form