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Pensions hit by new IHT ruling

10 May 2010

An unexpected legal victory for HM Revenue & Customs (HMRC) in the case of Fryer v HMRC could lead to deferred pensions being subject to inheritance tax (IHT) and overturns nearly twenty years of established practice.

Martin Reynard, of London-based accountants Blick Rothenburg, said: "In 1992, HMRC stated that it would not seek to apply IHT on the overwhelming majority of deferred pension funds, but would look closely at situations involving terminal illness. This has always been taken to mean that if the Revenue believes that someone has deliberately denied themselves income solely to preserve their pension fund and keep it outside their estate, then they will act. Now we have a situation, where the Revenue is ignoring the wider circumstances. Regardless of actual income needs, it considers that where an individual could take their pension but decides not to, this is IHT avoidance."

Tom McPhail, pensions expert at Hargreaves Lansdown, said: "Having read the Judge's notes, it appears to pivot on this decision not to take benefits at the specified date. In theory therefore, it does appear to set a precedent which could be applied more generally to undrawn pension funds on death. I don't think we can interpret this judicial decision as definitive until HMRC has issued unambiguous guidelines as to when pension funds will be liable to IHT."

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