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HMRC internal manual

Inheritance Tax Manual

Pensions: omission to exercise a right: the legislation in detail

IHTA84/S12 (2A-G) applies to members of registered pension schemes who are under age 75. These provisions prevent an omission to exercise a right to pension benefits from being a deemed disposition in certain circumstances. These are derived from the situations that were set out initially in a Tax Bulletin (IHTM17101).

In general, an Inheritance tax charge could arise where a scheme member omitted to take their pension benefits at a time when their life expectancy was seriously impaired. This would result in enhanced benefits being paid on their death. The omission by the scheme member to take the pension benefits is treated as a disposition under IHTA84/S3(3) which constituted a transfer of value:

  • which did not qualify for the exemption for ‘arms length’ dispositions under IHTA84/S10, and
  • when tested at the ‘latest time’ that they could exercise the right (that time being immediately before their death) resulted in a chargeable transfer.

The omission is not treated as a disposition if;

  • there is an actual pensions disposition (IHTM17305), which is not within IHTA84/S10, within 2 years of the death and it can be shown that, at the time of that disposition, the scheme member had no reason to believe they would die within that period
  • the lump sum death benefit is paid to a relevant dependant
  • there is a payment to a charity