Yes, when calculating the 25% tax-free lump sum available for withdrawal from your pension, the value of commercial property held within your pension is included – even though it’s not in a cash/liquid format.
When taking benefits, the normal practice is to value the whole of your pension scheme, which includes all assets – cash, investments, and commercial property held within the pension.
You can usually take up to 25% of the total value of your pension fund as a pension commencement lump sum (PCLS) (tax-free lump sum) if you have scope within your Lump Sum Allowance. Certain restrictions may apply.
The deemed market value for property valuation in the context of pension scheme calculations is defined as the estimated amount for which a property should exchange between a willing buyer and a willing seller, in an arm’s-length transaction, after proper marketing and where both parties have acted knowledgeably, prudently, and without compulsion. This definition is set by the Royal Institution of Chartered Surveyors (RICS) and is referred to as the ‘Red Book’ valuation.
So, if your pension owns a commercial property, its market value (as determined by an independent valuation) is factored into your total pension value for this calculation.
However, while the property’s value is included in the calculation:
Yes – a pension death benefit trust (or bypass trust) can be set up before death. The trust can be established by the pension scheme member during their lifetime. The trust normally houses a nominal sum such as £10, so that it exists and is able to receive any lump sum death benefits on the member’s death
Yes, you should record all gifts of when they were made and the amounts. There is a natural audit trail if gifts have been made from cash from your accounts. Informing your accountant, solicitor, or the potential executors of your estate of the gifts that have been made would be sensible.
There is nothing to stop you doing this, but it may well depend on the timing of when you do it. There may be other consequences if you do it in later life if there is a chance you may need to claim for care home costs. If this is not relevant, you could remortgage your home to make gifts. It may not be a sensible strategy to go into debt and would need to be looked at in more detail as to the pros and cons of doing this.
I think each client would be on a case-by-case basis. We can value the pension and personal assets to see if there is a liability and the life cover would make sense depending on the level of liquidity of the estate and whether any gifts can be made to reduce the impact of Inheritance Tax (IHT). Life cover is almost the last resort if there are no other planning options or all assets are tied up.
Inheritance Tax Manual (IHTM14250) states that “income is not defined in the IHTA84 but should be determined for each year in accordance with normal accountancy rules. It is not necessarily the same as income for income tax purposes”.
Inheritance Tax Act 1984 (IHTA 84) s21 exempts lifetime gifts that (i) form part of the donor’s normal expenditure, (ii) are made out of income ‘taking one year with another’, and (iii) leave the donor with sufficient income to maintain their usual standard of living. Whether the tax-free element of a pension (the 25% pension commencement lump sum, ‘PCLS’) counts as ‘income’ for this purpose has been debated for years. No statute defines ‘income’ for s21, so the answer must be pieced together from case law, HMRC manuals and professional guidance.
After analysing the primary legislation, HMRC’s Inheritance Tax Manual (IHTM), the Pensions Tax Manual (PTM) and the small body of relevant case law, the position is:
Therefore, pension scheme tax-free cash does not automatically meet the definition of income for the gifts-out-of-excess-income exemption. However, there is a possibility it may qualify where withdrawals are structured as regular, surplus-to-needs income and rigorously evidenced.
However, ultimately individuals should seek their own tax advice and executors should expect close HMRC scrutiny and should plan record keeping accordingly.
It will depend on the asset that is gifted away. If an asset is gifted into a trust, Capital Gains Tax (CGT) may be payable on gains within the trust at the trustee’s rate. This probably needs a bit more of a discussion on the different types of assets that are gifted.
Correct. There is no Inheritance Tax (IHT) when bequeathed to one’s legal spouse. It is on second death when passed to children that IHT will be payable under the proposed rules. There is no suggestion that this will change from the information we have so far.
Unfortunately not. As the member has received tax relief on contributions, HMRC views the pension scheme as only the member’s fund in their lifetime. It has its own set of rules, with Potentially Exempt Transfer (rules not applying to a pension scheme.
To qualify for small self-administered scheme (SSAS) exemptions, all members must be trustees. Minors cannot be trustees under trustee law – so to be a trustee of a SSAS, an individual must be at least 18 years old. Once over 18, you can add them to the SSAS as both member and trustee. If the child is under 18, they cannot be either trustee or member. However, they can be nominated as beneficiaries, if there were death benefits, but they would not have any control or decision-making power until they reach 18. Please note, a SSAS requires all member trustees’ agreement to make decisions, so the existing trustees need to consider the maturity of trustees to take on trustee responsibilities and consider any concerns over family dynamics.
Trustees must:
For a multi-member SIPP, they can be members – but again each case needs to be considered it its own rights to ensure this is in the best interest of the child and whether they may be better building up a pension pot outside of the SIPP initially – of course client circumstance will dictate the best course of action.
Property can be placed in a trust, but I have not come across it being loaned into a trust. I think that a wider discussion on this and specific details of other assets would be worthwhile.
Yes, we are still recommending pension schemes for younger individuals to take advantage of tax reliefs available and this is sensible planning. I think moving forward, we will be targeting the pension fund to provide a certain level of income at retirement and therefore may put a ceiling on contributions once we get to a targeted fund value. This will depend on other income sources in retirement as well.
It will depend on the type of bond adopted within the Discounted Gift Trust (DGT). On establishing the bond, there are planning options to mitigate from this eventuality so that the trustees have the capacity to assign policies from the bond to the beneficiaries to use the beneficiaries’ rate of Income Tax.
The proposals as they stand indicate that, a UK pension remains a UK-sited asset for IHT after April 2027. So, from 6 April 2027, most unused pension funds and death benefits from UK-registered pension schemes will be included in the estate for IHT purposes. This applies regardless of the country of residence. It’s always been the case that non-discretionary UK registered pension funds are UK-sited assets but, previously, discretionary schemes were exempt. We will continue to watch this space though as the non-resident question is quite topical.
The client has a few options.:
This does depend on the age of the member when they pass away. Before the age of 75, there will just be the 40% IHT charge on their estate above the nil rate band allowances. After the age of 75, yes, the beneficiaries may need to pay IHT on death on the member and Income Tax when they withdraw their funds, depending on how the IHT liability is settled, and therefore planning is needed around this. We are still waiting for the fine detail of the legislation before we can confirm this for definite.
Funded Unapproved Retirement Benefit Schemes () are already within the scope of IHT following HMRC vs Parry (Staveley case). However, it may be that the changes being brought in from 2027 will also strengthen the current position on non-discretionary pension funds and FURBS.
Yes, potentially they will be. For a DGT, if the settlor is still alive, we discount the value of the trust fund to reflect the settlor’s retained right to withdrawals. We can also use a principle called Rysaffe to create multiple trusts to minimise the ten-year anniversary tax charges. Exit charges may apply when assets leave the trust to beneficiaries, depending on the trust’s value, growth, and any prior chargeable events. Withdrawals under the settlor’s retained rights are not subject to exit charges.
It is permissible to notionally earmark specific scheme assets for the benefit of particular members. The growth of the individual benefit funds of the members in question will then be determined by the growth in value of the investments notionally earmarked to each member. This does need to be regularly reviewed, however, to ensure it is not viewed by HMRC as a surrendering or assigning of rights. Each case would be determined by its own merits.
There is no limit on the amount of the gift. However, if the gift is made into trust there will be a 20% IHT tax charge on the excess over the nil rate band.
A property can be gifted to a child and yes it would be a PET. The property may well have gains on it at the time of the gift, so there may be CGT to pay on the gift. This may need some external input on the tax consequences of the gift.
You can still claim both the transferable nil rate band (NRB) and residence nil rate band (RNRB) for a surviving spouse. If the first spouse died before 6 April 2017 (when RNRB was introduced), 100% of the unused RNRB is deemed available for transfer to use on the death of the surviving spouse. Except where the first spouse’s estate exceeded £2 million (where taper rules may apply).
Yes, a level term assurance plan can be set up. I mentioned a whole of life (WOL) plan and a ten-year reviewable WOL plan, but a term assurance with a bespoke term could be set up. Not all insurance companies will set up life assurance for 90-year-olds; they tend to cap it at age 75 but one or two companies may offer it.
The client would make a cash gift to the trust and we would medically underwrite the client to see what discount is available. We would set up an income stream and part of the gift would be free of IHT immediately and the remainder after seven years.
Gifting the principal private residence (PPR) is very contentious and we do not provide advice on this. Some solicitors and accountants may advise on this; the issue being that parents will still live in the property, which makes it a gift with reservation.
It does depend on how the plan has been established – with added-in death benefits, i.e. a guarantee or value protection (the annuity protection lump sum death benefit), there is a return on death. But with no added-in death benefits, the annuity ceases at date of death with no return. However, most fixed-term annuities include value protection so that on death, the purchase price minus the income paid (and charges) is available as a death benefit. However, you need to check the provider’s terms and conditions. Currently, lump sum death benefit payments from an annuity are included in the estate for IHT purposes (this includes the actuarial calculation of any guarantee or the value of the annuity protection lump sum death benefit). The suggestion is that this will continue if the April 2027 changes proceed as proposed.
