Draw On Pension Or Face Inheritance Tax Bill

by Amanda Banks, Tax-News.com, London

23 July 2010

Though rules on purchasing annuities have been relaxed, pensioners are being warned that their beneficiaries will face Inheritance Tax bills if they do not draw down their pension fund at some time during their life.

The government's announcement last week on relaxing the rules on buying an annuity at 75 is welcome, but a tax tribunal ruling published earlier this year on the payment of Inheritance Tax on undrawn-down pensions should serve as a warning to anyone who delays drawing their pension income, warns Susan Midha, partner at Adams & Remers. In a ruling delivered December 2009, the pension plan of the deceased has been deemed to be part of her estate and subject to Inheritance Tax rules.

The deceased, Mrs Arnold, had set up a discretionary trust in 1995 when taking out a pension plan under which she could take her retirement benefits at any time between her 50th and 75th birthdays with the normal retirement date under the policy chosen as 60. If she died before drawing her pension the value of the benefits would pass into the trust. Mrs Arnold died in 2003 after her 60th birthday without having taken any pension payments from the plan.

HMRC issued a determination charging inheritance tax on the basis that the deceased had made a transfer of value for the purposes of Inheritance Tax Act by not drawing her pension under the plan.

Midha comments: “HMRC viewed this as a deliberate decision not to take her pension which led to her own estate being reduced. HMRC didn’t accept the argument that the deceased hadn’t needed to draw on the pension and had she known about the effect it would have on her estate she may have taken further advice to avoid this."

She adds: “This is a ruling which surprised and concerned many members of pension schemes and their advisers and is of particular relevance to those who are hopeful of avoiding the need to draw a pension or buy an annuity after they reach 75.”

Midha concludes: “With the government’s announcement last week on the ending of the requirement to buy a pension annuity, I would urge people to take advice on their pension decisions and the possible tax liabilities they may expose their estate to. This is unlikely to be an isolated case and HMRC will almost certainly be pursuing other individuals who have set up similar pension arrangements.”

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