Paper chain

Some aspects of the private client adviser’s work can be far removed from his or her own personal financial affairs: cross-border wealth structuring for UHNWIs is, in the words of the anonymous Victorian reviewer of Shakespeare’s Antony and Cleopatra, so “very different from the home life of our own dear Queen”. But there are topics where professionals are likely to tune in particularly closely, because this is an issue that affects them personally. One such area is pensions.

Skeleton outline

A familiar angle on pensions is inheritance tax (IHT) structuring, generally arranging for the death benefits of multiple pensions to pass to a single trust. A notable further trend in recent years has been a movement, among ?those with higher-value pensions, into self-invested personal pensions (SIPPs): the independence they provide can be very attractive. Recent consolidating Q&As agreed by the Association of British Insurers (ABI) and HMRC not only provide useful clarification ?of the IHT position, but also show ?that individuals could lose out – to ?the extent of one or more additional IHT nil-rate bands (NRBs) – if they fail to keep the proper skeleton of paperwork when multiple pensions ?are consolidated into one SIPP.

The two types of pensions a private client adviser is most likely to deal with are either modern trust-based pensions (probably personal pensions or SIPPs) ?or old contract-based pensions, generally known as retirement annuity contracts, established in the years up to 1988.

Individuals often amass quite a number of different pension policies over the years. In the pre-SIPP world, any ‘consolidation’ of multiple pensions might well have only involved arrangements to combine all the death benefits into one, often discretionary, trust. However, where a SIPP is involved the pensions themselves are consolidated into the SIPP and a death benefit trust may or may not be part of the ‘package’. The Q&As deal with a range of possibilities and anyone dealing with a case in practice will certainly need to consult the detail. A couple of the Q&A scenarios are taken here by way of example.

First, a simple example, where the death benefits of the policies are consolidated but not transferred to a SIPP (see box 1). Suppose Albert has three trust-based pensions (personal pensions, not retirement annuity contracts, where the analysis would be different). Pension one (P1) started on ?1 January 1980, pension two (P2) started on 1 June 1990 and pension three (P3) started on 1 December 2000. Albert creates a pilot discretionary trust with £100 on 1 September 2009, and by letters of wishes requests the trustees of the death benefits of P1, P2 and P3 to pay any death benefits to the discretionary trust. He dies on 10 January 2010 and his wishes are followed.

The trusts are ongoing and the trustees start to wonder what the trust’s commencement date was, and so when they need to be ready to pay their first ten-year charge. The date the trust was constituted with £100 they assume, not the date of death? This is indeed the effect of section 71 of the Inheritance Tax Act 1984 (see also IHTM 17126) but that is only part of the story. For IHT purposes there are no less than four settlements here, each with its own commencement date (1 January 1980, 1 June 1990 and 1 December 2000 and 1 September 2009) and each with Albert, the policy holder, as settlor. This means four separate ten-year anniversary (TYA) returns, all at different dates, requiring separate accounting for each fund within the trust to enable them to be completed correctly.

History books

So far, so bad, but this cornucopia of settlements may also provide a benefit. In the Q&As HMRC acknowledges that, given that there are four settlements and the deceased joined each scheme more than seven years after his previous pension scheme joining date, each settlement has its own NRB available to it.

When a consolidation exercise of this kind is carried out, the pension policies themselves all remain in being and their paperwork will continue to be kept carefully until the death. This contrasts with many cases when pensions are consolidated into a SIPP. Then there can be a tendency for an individual to heave a sigh of relief and consign the old pension papers to history – a history that his or her executors may well not be able to find.

The following example derived from the Q&As gives some pointers of a helpful pragmatic attitude by HMRC to establishing TYA dates when papers have been lost. Where values are high, however, there could be few things more helpful than having sufficient paperwork to demonstrate an entitlement to multiple NRBs.

Suppose Beatrice (see box 2) had three different pension policies, all trust-based, one starting in 1988, one in 1996 and one in 2004. She consolidates them into a trust-based SIPP in February 2008, and from 2008 onwards she contributes funds directly to the SIPP. She sets up a pilot discretionary trust funded with £100 in March 2008, ready to receive the death benefits in the event of her death. She dies unexpectedly in March 2010.

In this relatively commonplace scenario, the IHT analysis is that there are no less than five different settlements, A, B, C, D and E (see box 2), and, strictly speaking, they each have their own TYA and would each require separate accounting. The Q&As set out that HMRC has agreed to a concessionary position: where IHT is due multiple IHT100s would prima facie be necessary, but if difficulties arose tracing the consolidated fund back to trusts A, B, C, D and E, then “I am sure we would take a pragmatic approach probably based on some form of pro rata apportionment. Where it is clear on values that no IHT is due we would take a pragmatic approach and, where possible, not insist on a formal accounting on Forms IHT100.”

Cold comfort

It is important to note just how far this comfort does, and does not, go. HMRC only says that where IHT is due “they are sure they would take a pragmatic approach” and that it would “probably be based on some form of pro rata apportionment”. They also say that when no tax is due they would where possible not insist on a formal accounting on Forms IHT100.

Interestingly this particular Q&A, focused on the possibility of a concessionary approach, does not specifically address the question of available NRBs. This may just be for simplicity in the Q&A itself, but a possible explanation in some cases may be that, where one is having to rely on HMRC’s willingness to take a pragmatic approach because of difficulty in tracing the funds back to the original trusts, then that lack of paperwork may itself make it hard to prove the availability of the multiple NRBs.

Where pension funds are consolidated into a SIPP the moral is clear: keep your paperwork for the superseded pension policies, and keep it in good order.

The Q&As cannot currently be readily tracked on either the HMRC or the ABI websites. At the date of writing they could, however, be found at https://wingatefp.com/uploads/2011.06.20_abi_pensions_q_and_a_paper_2.pdf n

Judith Morris is a consultant at Bircham Dyson Bell LLP