RPSM04100060 - Technical Pages: Taxation: Overview: Inheritance tax

Inheritance tax

There is not a general exemption from inheritance tax for registered pension schemes.

Most pension schemes are administered by trustees according to rules set out in formal documents, known as trusts. These contain detailed provisions about the membership of a pension scheme, the duties and powers of the trustees and the entitlements of members of the scheme and their dependants to benefits on retirement or death in service.

Trusts of this kind are settled property for inheritance tax (IHT) purposes and this would have a number of IHT consequences for registered pension schemes and schemes for non- residents within section 615 ICTA 1988. Inheritance Tax Act 1984 (IHTA) includes specific provisions for these schemes which take them outside the usual IHT charges on these settlements:

• contributions by individuals or close company employers are not regarded as chargeable transfers and so are not subject to IHT (effective rate of up to 20%);
• scheme funds are not subject to the IHT charges (of up to 6%) which would otherwise arise every 10 years on the current market value;
• IHT charges (of up to 6%) do not apply to distributions of capital from a scheme, for example, those to provide a lump sum on a member’s retirement or a death benefit to a member’s widow or widower;
• on the death of a scheme pensioner or annuitant, their estate for IHT purposes is regarded as not including any part of the scheme funds relating to that pension or annuity.
• It follows that these exemptions extend to the schemes themselves, those who contribute to them and those who benefit from them.

Inheritance tax is administered by HMRC Capital Taxes and any question of inheritance tax and pension schemes should be taken up with them. The inheritance tax pensions helpline number is 0131 777 4296.

Also, see RPSM04106000 in respect of IHT and tax charges on unauthorised payments in relation to remaining alternatively secured pension funds on the death of a member or remaining dependants’ alternatively secured pension funds on the death of a dependant.