Trust tax single or multiple settlements

[maths]

Lee, not sure i disagree with your last posting; i think s81 is key as it appears does HMRC from the page i found referred to above.

Perhaps with you and me (with the greatest of respect, of course) it is the blind leading the blind when it comes to pensions; Loza, however, seems on the ball.

[Anthony Nixon]

Maths/Lee

On this rather obscure point it is you who are right and Loza is wrong.

Maths points quite correctly to HMRC's guidance in IHTM17126 and it is worth copying here the opening paragraphs (I have added emphasis in capitals where appropriate)

Where the death benefit
•is payable under the scheme rules to the member or their estate (in other words, where there is no initial discretionary trust under the scheme rules), and
•it is then settled by the member during their lifetime or by their will ( )
the first ten-year charge after death is CALCULATED FROM THE DATE THE MEMBER SET UP THE TRUST.

Where however the death benefits
•are held on discretionary trusts from the start, and
•on the deceased's death they are paid to a new discretionary trust
they are effectively moving from one discretionary trust (the original pension scheme) to another discretionary trust (the recipient discretionary trust). In this instance IHTA84/S81 applies for setting the date of the ten-year charge. Under s.81 the date for the ten-year charge is THE DATE THE MEMBER FIRST JOINED THE ORIGINAL PENSION SCHEME.

Loza is absolutely right that, during lifetime, the pension fund is not in the relevant property regime - it only enters the relevant property regime after death.

But s81 deals with the date the assets now in the relevant property regime are DEEMED to have been first settled, for the purpose of fixing the ten year anniversary dates and the calculation of exit and ten year charges. As IHTM12041 goes on to say:

Although treated as remaining in the original discretionary trusts for ten-year charge purposes THE FUNDS ARE HELD ON THE TRUSTS OF THE RECIPIENT SETTLEMENT FOR ALL OTHER PURPOSES.
As Lee says there is only one settlement for income tax and capital gains tax, and there is only one settlement from a legal point of view.

But there are three separate settlements, and so three separate ten year anniversary dates, and potentially three nil rate bands, for the purpose of charges in the IHT relevant property regime.

Anthony Nixon CTA TEP Solicitor
Partner, Thomas Eggar LLP, Southampton and Chichester
anthony.nixon@thomaseggar.com
023 8083 1224

[Loza]

Anthony
I note your point and your reference to IHTM 17126, I must suggest with respect that you are quoting and relying on out of date guidance, if you follow the links in that guidance it is clear that they refer to a situation that was completely replaced with A Day on 06/04/2006.
At that date all exempt approved schemes were automatically opted into the FA2004 provisions, if they chose to opt out and become unaproved then they incurred a penalty of 40% of scheme assets at 06/04/2006.
One assumes that the scheme in question was opted in, it was required as a result to re draft its scheme rules to comply with the rules applying in FA 2004.
The new rules are laid out in the Registered Pension Schemes Manual
RPSM 09100000 deals with member benefits
RPSM 10100000 deals with death benefits
RPSM 14100000 deals with transfers.

If you study these pages it will be clear that a transfer to a DT is not an authorised payment, it is therefore in pension speak an unauthorised payment and will incur a tax charge of up to 70%.
The last government were bitterly opposed to the notion of tax relieved pensions being handed down to future generations.they encouraged the member to annuitise if he did not the policy was to take as far as possible the fund on death in tax.
Since the transfer can not be an authorised payment nor transfer (unless made to another exempt approved scheme, in which case the issue does not arise, or alternatively QROP(d) (Are you aware of any scheme under a QROPS that has been taxed under S81?)., since by concession they are treated as exempt approved the issue cannot arise.
The issue is an important one, since if it were possible to transfer pensions in the way it is suggested, then it would dive a proverbial coach and horses through the legislation.
An obscure point may cover issue of what is left of the funds (not much) when entering the DT.
Could S81 apply, I suggest not for two reasons
1 the Pension lost its identity when it became an unauthorised payment
2 when leaving the approved scheme some one would by definition become beneficially entitled so negating S81.

[Anthony Nixon]

Loza I fully agreewith your latest posting

It would certainly not be right for the pension funds to be transferred direct to a discretionary trust

I was addressing the scenario which Bill originally posted where the trustees of the pension have transferred funds of the deceased to a trust which he set up

The rules I was concerned with are those which dictate how ten year and exit charges are calculated and, in particular, what is the start date from qwhich ten years is counted

Anthony

[Bill2]

Hi Guy

Thanks for all the valuable input and discussion; all my original questions have been answered.


However unauthorised payments AH! (income tax 40%+possible 15% surcharge) I was not aware of this if death occurred before 75 and the pension was not in payment. I used to think that lump sum death benefit could be paid tax free to a discretionary trust

Loza as the pension expert, could you please explain why leading life and pension companies are still offering discretionary spousal bypass trusts (I did a search and there is still a lot of recommendations for spousal bypass trusts out there) and they make no mention of the unauthorised payment charges. Where am I going wrong?


Thanks
Iain

[Loza]

Bill 2

If the benefits in the fund have not crystallised as you suggest,prior to age 75, then a lump sum death benefit can be paid (within 2 years) without any tax charges.
This is the case whether it is a money purchase or defined benefit scheme.
In this scenario the benefits can be paid into a DT, we go back to the original debate, I would maintain that this is a new DT without reference to anything that went on before.
A spousal bypass trust offers the potential to avoid an IHT charge on the second death.
If the fund had crystallised (whether unsecured or secured) then I believe the new 55% tax rate would apply.