HMRC considers aligning IHT on contract and trust-based pensions

HM Revenue & Customs (HMRC) is examining whether to bring the inheritance tax (IHT) treatment of contract-based pensions in line with that for trust-based pensions, according to Standard Life head of estate planning Julie Hutchinson.

When pension funds are moved into trust, HMRC treats each trust-based pension separately regarding, for example, anniversary dates and nil-rate bands. However, consolidated contract-based pensions moved into a by-pass trust will only ever be treated as a single trust fund.

Hutchison argued there was a case for treating contract-based pensions like trusts and has asked HMRC for clarity.

‘The Revenue’s reasoning has been that trust-based pensions are completely different to contract-based pensions,’ said Hutchinson. ‘But with contract-based you still have letters of wishes and advisory boards.

‘HMRC is looking at widening the trust definition. There are reasons to argue for multiple treatment [of contract-based pensions]; I have asked about this.’

Hutchinson formed part of the Association of British Insurers (ABI) 2010 tax working group that looked at the difference between trust and contract-based pensions.

At that time HMRC confirmed there was just one settlement and one nil rate band for IHT purposes where the ‘feeder’ pension funds were contract-based, pointing to the lack of a prior trust settlement.