When I started with the Inland Revenue in the late eighties one of our most useful leaflets was called, “What Happens When Someone Dies”.
The ambiguity in that always amused me as it seemed more appropriate to describe how the human body dies. But I couldn’t offer a different title as “What happens after someone dies” moves from the medical practitioner to the theologian.
Also during my Revenue career, I came across the case law concept of the man on the Clapham omnibus. In a nutshell what would seem reasonable to the average man or woman.
These two ideas collide when it comes to most pension death benefits.
These are written such that the payment or otherwise of these is totally at the discretion of the administrator. As a result of this, the payment of contributions by a member to such a pension scheme is not within the net of inheritance tax (IHT). If there is no discretion and the member can direct where the benefits are paid than IHT is payable.
So what happens after a member of a scheme dies?
At some point, the scheme will be informed and a process will kick off. It’s important to note that a clock starts ticking from the time the administrator is informed of the death.
Up until two years have passed, the payment of the benefits in certain circumstances will be tax-free.
After two years the tax treatment changes. If you think that a deceased client had particularly shambolic administration or family arrangements you might want to set about gathering the necessary information thus allowing the maximum time for the scheme to exercise its discretion.
The scheme is likely to have a form on which it gathers details of the correspondent, the potential beneficiaries, evidence of death and marital status both current and past.
This information is used to determine who, under a combination of tax law and the scheme rules, could receive the benefits. This will then be compared with any wishes expressed by the member to the scheme. In most cases, the benefits will be paid to the person(s) nominated by the deceased member.
However, this simple process can be a lot more complicated. So please watch out for and avoid:
- Correspondence containing instructions or commands: “Please pay”, “I want these paid to”, “I instruct you to pay” – these are just not helpful and if left unchallenged could cause problems later. The easiest way for the scheme to protect the beneficiaries is to write pointing out that they can’t be instructed and ask if there is other information that would help them exercise their discretion. So much easier not to be instructed in the first place.
- Avoid bias. If you’re acting for one side of a family you have your client’s interests at heart. The man on the Clapham omnibus would, therefore, say ‘they would say that, wouldn’t they?’ You, therefore, need to avoid statements like, “Miss X is financially self –sufficient and doesn’t want support” if you’re not acting for Miss X. The next question is do you have contact details whence came the answer, Miss X was estranged 35 years ago and we’ve had nothing to do with her since.
- Avoid errors. If you are asked to provide a marriage certificate and to answer a question about previous spouses please make these consistent. If the form says “no previous spouse” and the marriage certificate says “previous marriage dissolved” then somethings not right and a question from the scheme will be forthcoming.
- If your client does something strange that would be hard for the man on the Clapham omnibus to swallow please get the client, if you can, to write something down. In this category is the client who puts in a new nomination replacing his wife with his previous wife; or his current wife with his uncle. There were good reasons for both these actions but they were contentious and caused a lot of correspondence.
- Please don’t get precious – if you’re acting for a party who is claiming dependency on the deceased; or for a party claiming that such a dependency didn’t exist then a reasonable administrator is going to ask for details of means and assets. This isn’t an unreasonable request. Please convince clients to comply, first time and consistently.
- Make sure what the nomination says matches facts on the ground. Your client may well want to nominate the Man on the Bus No.3 Discretionary Income Trust and the nomination form says the same but if the trust hasn’t been created then it doesn’t help.
- Give the scheme all the relevant details before they exercise discretion, not after. So if two of the children want to share the income of a property and the third doesn’t, that’s something that needs to be decided before the exercise of discretion and the distribution. Putting it right afterwards looks like assignment and that’s an unauthorised payment.
I appreciate that’s a lot of detail. In summary: the benefits are paid under discretion so you can’t tell the scheme what to do, but discretion is exercised on the basis of information so you can help by making sure all relevant information is provided up front.
It would be even better if HM Treasury/HM Revenue & Customs would change the rules to allow non-discretionary death benefits. We’ve said the same to the Office of Tax Simplification and the Chancellor. But while we’re waiting I hope the above might be of some help.
Peter Hopkins is technical resources director at AJ Bell