As an expat or an international worker, you may have planned your finances carefully. But if you have left your pension behind in the United Kingdom, have you considered what its position is regarding inheritance tax?
The recent legal case of Fry v HMRC may focus your mind on the issue.
It concerned a lady who had been diagnosed with terminal cancer. Given that she knew that she did not have very long left to live, she decided that she would not take the benefits to which she was entitled from her private pension when she turned 60. Her rationale was that she did not need the money.
However, little did she know that the effect of this decision would be to make most of the pension pot chargeable to inheritance tax.
Under the current rules on the subject, the law makes a distinction between pension assets that have crystallised and those that have not. A member of a UK pension is typically able to take her benefits from the age of 55, although the individual scheme may have provided for a later pension age. Before benefits are taken, the assets are said to be non-crystallised. Should the member die at this point, the pension assets would be outside of their estate for the purposes of IHT.
However, once the member has taken benefits, the residue that is left is typically chargeable to IHT.
From the analysis above, you may have expected Ms Fryer’s relatives to have received her pension assets directly without having to pay tax on them. However, HMRC took the view that her decision not to take benefits was a transfer of value which had reduced the value of her estate for IHT purposes. Accordingly, whilst she had not set out to put any tax mitigation plans in place, her estate was treated as though she had and IHT was payable on her pension accordingly.
The case shows that HMRC are increasingly trying to reach their tentacles further and further to claw back as much tax as possible. A QROPS was not available to Ms Fryer as she was UK resident. However, if you have left the UK, you may wish to take action to protect the pension that you have left in the UK. HMRC have confirmed that QROPS are exempt from UK IHT, whether you have taken your benefits or not.
