Pensions: IHT charges: unregistered schemes and gifts with reservation
Where a member of an employer-financed retirement benefits scheme (EFRBS) (IHTM17027) makes (or is deemed to make) a disposition in connection with the EFRBS, the disposition may constitute a gift with reservation, where the class of discretionary beneficiaries includes the member’s personal representatives. In these circumstances:
- the scheme member will be the settlor (IHTM17073) because they have provided funds, either directly or indirectly, and
- the inclusion of their legal personal representatives amongst the class of beneficiaries is not consistent with their exclusion or virtual exclusion from the potential conferment of substantial benefit on them.
The rationale for this is as follows:
- the EFRBS is a settlement for Inheritance Tax purposes
- an unregistered scheme is not within the protection afforded by Statement of Practice 10/86, so the gift with reservation provisions may in principle apply to an EFRBS
- the death benefits provision under an EFRBS is an item of property for IHT purposes IHTA84/S272. As such it can be the subject of a disposition by the scheme member either on joining the scheme or at any time during their lifetime before they retire. Accordingly it is capable of being the subject matter of a gift. While it is usually of no more than nominal value, its value at any given time will depend on the age and state of health of the scheme member.
- the member or their estate is not excluded from enjoyment and benefit of the death benefits FA86/S102(1)(b) where the objects of the discretionary trust include the member’s legal personal representatives.
- although the member might not personally benefit that does not prevent them from deriving a benefit. An individual can derive benefit where property is provided for the benefit of others In re Halstead’s Will Trust (1937) 2AER 570 and it is not just actual benefit but the potential for benefit which leads to reservation see IRC v Eversden EWHC 1360. Lightman J stated at para 16 and 17:
- ‘16 The Commissioner in para 79 of the decision held that the settlor’s entitlement to be considered as a potential recipient of benefit by the Trustees precluded a finding that the Trust fund was enjoyed to the entire or virtually entire exclusion of benefit to her under the Settlement
- ‘17 I entirely agree. The insertion of the provision enabling benefit to be conferred on her creates the potential for the conferment of substantial benefit on her and the consequent diversion of benefit from others. The provision in her favour is not consistent with her entire exclusion or her virtual entire exclusion from benefit. It cannot be entirely discounted or virtually entirely discounted by evaluation of the probabilities or other wise for conferring benefits on her.’
If you have a case where there is a potential gift with reservation, you should obtain a copy of the Trust Deed or Scheme Rules and ask for advice from Technical.