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HMRC internal manual

Inheritance Tax Manual

Dispositions allowable for income tax or conferring retirement benefits: provision by employers for employee's retirements

Under IHTA84/S12 (2)(a) and without prejudice to IHTA84/S12 (1), a disposition (IHTM04023) is not a transfer of value (IHTM04024) if it is a contribution to an approved retirement benefits scheme  (IHTM17000) under ICTA88/PARTX1V/CHAPTER1 (occupational pension schemes) and provides benefit in respect of service as an employee (as defined in that Chapter) of that person (IHTM04052).

Such contributions are likely to be deductible for income tax purposes (IHTM04192) anyway and so fall under IHTA84/S12 (1). This provision will apply where retirement benefits are provided under an approved scheme for domestic and other employees, the contributions for whom are not deductible for any tax purpose.

Under IHTA84/S12 (2)(b), there is corresponding relief where a disposition is made to provide benefits on or after retirement for an employee (or, after the employee’s death for his widow or surviving civil partner (IHTM11032) or dependants) other than by contributions to an approved scheme. Provided the employee is not connected (IHTM04164) with the transferor, the disposition will not be a transfer of value if it does not result in the recipient receiving greater benefits which, having regard to their form and amount (IHTM17000) are greater than those which could be provided under an approved scheme.

Under IHTA84/S12 (2)(c), there is a similar relief for a contributions to an approved personal pension scheme (IHTM17000) under ICTA88/PARTX1V/CHAPTER1 taken out by an employee of the transferor.

IHTA84/S12 (3) stipulates that if an employer makes dispositions of more than one kind under IHTA84/S12 (2), in respect of service by the same employee, the dispositions will only satisfy the conditions of subsection (2) to the extent that the benefits they provide do not exceed what could be provided by a disposition under one of the paragraphs. This suggests that the maximum permitted benefits under any one head must take into account benefits provided under other heads.

For the purposes of IHTA84/S12 (2)(b), there is a special rule about granting a retiring employee (or his widow or surviving civil partner and dependants) the right to occupy a house either rent-free or at a low rent.  Under IHTA84/S12 (4), such a grant is to be treated as a being equivalent to a pension corresponding to full rent, or extra rent, that would be obtainable in an arm’s length transaction. It is not therefore treated as the transfer of a capital asset, as might be the case, if a lease were granted.