Stand-out Q – bypass trust & IHT…

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TUE, 06 FEB 2018

Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.

Question:

What happens if a member sets up a James Hay By-Pass Trust while in ill health and dies 18 months later?

Answer:

The James Hay By-Pass Trust is a carve out trust. This means that when a member sets up the James Hay By-Pass Trust, they assign the rights to the death benefits to the Trust at the outset. Where the member is in good health and has a life expectancy of over two years, this is unlikely to trigger any inheritance tax liability, as the value of the death benefits assigned is likely to be negligible.

However, where a member is in poor health at the time of making the assignation, the value placed on the rights to the death benefits might be higher, and may approach the full value of the pension savings. This could lead to an unexpected inheritance tax charge if the member dies within two years of making the assignation.

The assignation should be reported to HMRC on Form IHT409 following the member’s death. The assignation is a transfer of property to a relevant property trust, and IHT may be due on death.

Our Tech Talk – Pension IHT pitfalls when dealing with members in ill health has further details on this subject.

Example
Frank sets up a James Hay By-Pass Trust in May 2017. He is in poor health and dies in June 2018 The value of the death benefits assigned to the By-Pass Trust in May 2017 is agreed with HMRC to be £400,000. Frank has not made any other lifetime gifts.

The transfer of the rights to the death benefits may be considered to be a chargeable lifetime transfer when reviewed following Frank’s death. The IHT charge is likely to be £30,000 (40% on the £75,000 excess over the £325,000 nil rate band available).

The above analysis does not apply where the member, while in poor health, sets up a pilot trust with e.g. £10 or a postage stamp and writes a non-binding expression of wish in favour of the trust. This is because there has been no transfer of value of the rights to the death benefits during lifetime, and the death benefits will be paid to the trust at the scheme administrator’s discretion.

HMRC’s manual discusses this in more detail at page IHTM17070

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