IHTM17152 - Divorce or dissolved civil partnership and pensions: pension earmarking where death benefit held on discretionary trusts

Where pursuant to the scheme rules the death benefit ( IHTM17030) is held for distribution among members of a class at the trustees discretion ( IHTM17053) (the member not having retained a right to direct payment) the Court may, on divorce or dissolution of a civil partnership ( IHTM11032), direct that the scheme trustees should hold some or all of the benefit for the former spouse/civil partner. Where this is the case it is probable that the ex- spouse/civil partner will have an interest in possession ( IHTM16061) in the whole or part of the death benefit from the time the Court Order takes effect.

In this situation

• in accordance with general principles the member will have made a transfer of value ( IHTM04024) when they gave the discretionary power to the trustees. Assuming that the member was in good health and could reasonably be expected to live to take the benefits provided on retirement, the value of the transfer would be negligible and thus have no IHT consequences
• as the member has already given away their right to, or control over, the death benefit there is no question of it being liable to IHT as part of their death estate following the Court Order
• prior to the Court Order taking effect the death benefit will be subject to a discretionary trust. It then represents property which is part of a fund held for the purposes of a scheme to which IHTA84/S151 applies. On this footing, it is not ‘relevant property’ - IHTA84/S58 (1)(d) - until the benefit becomes payable - IHTA84/S58 (2)
• accordingly where the effect of the Court Order is to terminate the Discretionary Trust and confer an interest in possession on the ex-spouse or civil partner it will not give rise to an IHT charge under the Discretionary Trust code
• when the death benefit becomes payable to the ex-spouse or civil partner no claim to IHT arises - this is the enlargement ( IHTM16092) of an interest in possession (IHTA84/S53 (2))
• should the ex-spouse or civil partner die before the death benefit is payable their interest in possession would form an asset of their estate for IHT purposes. However, the value would be nominal if the member was in good health at the time and likely to survive to take up their retirement benefits