.png)
.png)
The pension and life assurance scheme of a PLC provides, among other things, for benefits to be paid to the dependants of employees who die whilst employed by the company. Following the death of an employee, the trustees of the scheme created a discretionary settlement for the benefit of his children and grandchildren, transferring a substantial amount in death benefits. Is the deceased treated as the settlor for any purposes?
The pension and life assurance scheme of a PLC provides, among other things, for benefits to be paid to the dependants of employees who die whilst employed by the company. Following the death of an employee, the trustees of the scheme created a discretionary settlement for the benefit of his children and grandchildren, transferring a substantial amount in death benefits. Is the deceased treated as the settlor for any purposes?
Before his death, the deceased had created two settlements, the annual capital gains exemption for trusts being split between both under TCGA 1992, Sch 1 para 2(4). Does the creation of the latest settlement affect the annual exemptions of the others?
Also, how does one determine the date of the ten-year anniversary for inheritance tax purposes and is this affected if the two other settlements were also discretionary?
Query T16,673 — Gateshead Angel.
Reply by The Snark:
Before his death, Gateshead Angel's client had created two settlements. In charging capital gains to tax, trustees get the benefit of half the annual exempt amount under TCGA 1992, Sch 1 para 2(2) (currently £4,250). Where there are two or more 'qualifying settlements', this is reduced by dividing among the number of settlements in the group (but so as not to go below one-tenth of the annual exempt amount). This is contained in Sch 1 para 2(4) and has already been recognised.
'Qualifying settlement' is defined as '... any settlement (other than an excluded settlement) which is made on or after 10 March 1981 and to the trustees of which this paragraph applies ...' (see Sch 1 para 2(4)(a)). So far as I can see, there is no definition for this purpose of 'settlement'. The meaning of settlor is imported from ITTOIA 2005, s 620 (formerly TA 1988, s 660G). I think it must be reasonable to assume that one should look there for guidance on the meaning of settlement. If it is, then settlement means '... any disposition, trust, covenant, agreement, arrangement or transfer of assets ...'. I am in no doubt that the discretionary trust for death benefits is a settlement here. The real question is 'did the deceased make it?'
In the Inheritance Tax Manual at paragraph 17125, HMRC certainly seems to think that this is the case for inheritance tax. The reason for this is that pension benefits and rights are the product of sums paid into the pension fund by the employer as deferred or delayed remuneration for the employee's work. See, for example Parry v Cleaver [1970] AC 1. There is no corresponding commentary for capital gains tax, but surely similar considerations must apply.
However, this need not create a problem if the settlement is excluded. 'Excluded settlement' is defined in TCGA 1992, Sch 1 para 2(7) to include certain pension funds. The certain pension funds are further defined in para 2(8):
- s 615(3) i.e. annuities payable to non-UK residents;
- s 620/621 i.e. retirement annuities;
- s 624 i.e. sponsored superannuation scheme; and
- ChI Pt XIV, i.e. approved retirement benefit schemes.
In this case, the settlement of death benefits must fall out under one of the two latter categories. Therefore, its existence does not affect the capital gains tax annual exemptions of the two lifetime settlements made by the deceased.
Incidentally, 'Trust me' posed a similar question in relation to the settlement of rights under a personal pension policy. The replies published under 'A bad policy?' (see Taxation, 1 April 2004, page 25) made it clear that, in contrast to the present circumstances, such a settlement would not be excluded. There seems no reason for this paradox.
The potential inheritance tax charges and reliefs (some concessionary) in these circumstances are diverse and complex. Again, Gateshead Angel's attention is drawn to the Inheritance Tax Manual at paragraphs 17121-1726. The particular issue of ten-year charges is addressed at paragraph 17126. In this case, it seems that the death benefits are held on discretionary trusts from the start (those of the pension scheme) and then they are paid to a new discretionary trust specifically for the benefit of the deceased's children and grandchildren. They are effectively moving from one discretionary trust (the original pension scheme) to another discretionary trust (the recipient discretionary trust). In this instance IHTA 1984, s 81 applies for setting the date of the ten-year charge. That is the date the member first joined the original pension scheme. Clearly ten-year anniversaries before the death are ignored. Although treated as remaining in the original discretionary trusts for ten-year charge purposes the funds are held on the trusts of the recipient settlement for all other purposes.
Reply by Digby Bew:
On the assumption that we are here dealing with a funded, private, occupational pension scheme, the 'death in service' benefits payable as a result of the deceased's death are in all probability held by the scheme's trustees on discretionary trusts for distribution amongst a wide class of potential beneficiaries. To assist the trustees in exercise of their discretionary distribution powers, the deceased is likely to have completed a non-binding letter of wishes setting out his preferences for distribution to which the trustees will have had due regard in exercising their discretions. The trustees will no doubt also have carefully considered the breadth of their distribution power before establishing the new trust; if the power is to pay the lump sum 'for the benefit' of certain beneficiaries, this may be wide enough to authorise a transfer onto settlement, but may not be sufficiently wide to allow appointments onto discretionary trusts.
Broadly, IHTA 1984, s 151 operates to exclude from the inheritance tax net two benefits accruing from a variety of defined pension scheme types which might otherwise be potentially chargeable on a scheme member's death; namely the member's right to a pension and any lump-sum benefits which may become payable on his death. As to the latter, by operation of what HMRC regard as a concession (although it could be argued that this is in any event the effect of IHTA 1984, s 58(1)(d)), a lump sum which is subject to discretionary trusts after a member's death and remains subject to the trusts of the occupational scheme will not be 'relevant property'. So there is no exit charge when the lump sum is distributed or settled within two years of the scheme member's death (Statement of Practice E2, para 2).
Paragraph 2 goes on to provide that where the trustees of a pension scheme themselves settle the lump sum (or part) payable on the member's death on new discretionary trusts, the property concerned will then become subject to the discretionary trust inheritance tax régime as s 151 can no longer apply.
The results in this case are likely to be as follows.
i. Property has passed between discretionary trusts without an intervening beneficial entitlement; accordingly (IHTA 1984, s 81) the property is treated as remaining comprised in the first settlement.
ii. The view seems to be that the employee-member is the settlor even if he has made no financial contribution to the scheme although there is an indirect contribution through the employee's services to the employer. Whilst the benefits remain held for the purposes of the
scheme, the settlement is an 'excluded settlement' and so does not form part of the 'group' of qualifying settlements which shares the annual capital gains
tax allowance (TCGA 1992, Sch 1 para 2(7)); once the new discretionary trust is created, the settlement enters the 'group' with a proportionate reduction in the available annual allowance across the group.
iii. The commencement date is thought to be the date when the first contribution is paid in respect of the relative member.
iv. As the individual member is the settlor, other property within the scheme is not aggregated for inheritance tax purposes.
v. The rate of inheritance tax on chargeable events will be calculated by reference to, among other things, the deceased member's history of chargeable gifts in the seven years preceding the commencement date; thus, if the deceased's two other settlements were discretionary trusts, they may have a bearing in determining the inheritance tax rate, but, unless either or both of the other settlements commenced on the same day, they will not otherwise be relevant to the inheritance tax rate assessment as 'related settlements'.
It will be appreciated that the relatively benign inheritance tax rates applicable to property leaving a discretionary trust offer clear advantages in passing lump-sum death benefits through a discretionary trust rather than direct to the deceased's dependants.
Thus, whilst the effect of IHTA 1984, ss 69(2)(b) and (3) results in the value of the lump-sum benefits coming into charge as 'relevant property' on appointments from the discretionary trust between ten-yearly charges, considerable flexibility exists to phase distribution of the trust fund at modest inheritance tax rates according to the needs of the beneficiaries without having to rely on the funds otherwise reaching their final destination through an intermediate inheritance, at an inheritance tax rate of 40%, from the estate of a dependant paid directly by the scheme trustees.
