Pension transfers, QROPS and Inheritance Tax

Pension transfers, QROPS and Inheritance Tax are often a key discussion point for expats that have UK pensions but there are occasions where the unaware could end up paying the very tax they sought to avoid.

The issue was highlighted in a recent article in Money Marketing

No Inheritance Tax on pensions

 A transfer to a QROPS without due care and attention, may trigger they very Inheritance Tax charge that the ill-informed adviser will have suggested the transfer was recommended to avoid. While payments from UK pensions or QROPS, on death, do not incur Inheritance Tax normally (many QROPS websites incorrectly suggest that UK pensions do attract Inheritance Tax), the ironic thing is that they may when transferred for up to 2 years from the date of transfer-  including transfers to QROPS!

HMRC confirmed that such transfers would be treated as chargeable lifetime transfers if the member died within two years of making the transfer.

In other words, someone with an estate below £325,000 that is non-UK resident but UK domicile may find part of their estate liable to 40% tax on death after transfer to a QROPS or a SIPP when this was not the case before.

The Rules

A pension transfer brings an end any trust that applies to death benefits – Pensions: IHT charges: transfers between pension schemes  A transfer of value occurs to the trust of the new pension plan including QROPS. However, it does not apply to everyone and it can be legally avoided.

HMRC may look to apply it where the member dies within two years of the transfer and, at date of transfer, the member was in serious ill health. As far as we are aware HMRC have not tested a case so far. However, they do ask for a report to be completed by executers at point of death, and details of any transfers made within the 2 years before the death should be reported on the IHT409 (IHTM17014)

IHT 409

Details of any assignment of death benefits within the 2 years before a death should be included on form IHT409.

Advisers must be aware of this, when Inheritance Tax could be an issue for a client.

–  Write the pension plan under an appropriate discretionary trust as soon as possible i.e. before the client is in poor health. Set up a pilot trust to receive death benefits,  even if in ill health,  to make sure  the amount being transferred is not caught by the lifetime transfer rules which would catch an integrated ( irrevocable ) trust. A  pilot trust is only ever  revocable , via an expression of wish, at the discretion of the trustees.

– Alert the clients, and make arrangements accordingly, that are in poor health at the point of transfer if IHT is an issue

Summary

A transfer to a QROPS without due care and attention may trigger an Inheritance Tax charge that the transfer intended to avoid- one that was actually not there prior to the transfer! Do not believe all you read on QROPS websites and take transparent qualified and fee-based advice DIRECTLY from regulated firms with UK FCA pension transfer permissions.

Do not trust advice from a local adviser which has had a UK firm sign the advice off if you have never met, or spoken with the UK adviser or the specific UK firm and make sure you see the UK firm’s advice- specific to you-in writing.

The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

This article was published in 24th October 2016

“About

Chris Lean

Chris is a Chartered Financial Planner who writes blogs and articles to simplify and explain some of the financial issues that affect UK expats. Subjects include; hot topics, regulation and the ever-changing world of finance.

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