This advice assumes the reader is UK domiciled and the advice is framed on this basis.

Will UK inheritance tax be chargeable on a member who is domiciled in the UK and who makes transfers of property to a Fund?
Transfers of property to the Funds (which I shall refer as "contributions") should not by themselves give rise to a liability to inheritance tax.  This is because they are unlikely to be transfers of value or because they would be exempt transfers.

A disposition that is not a transfer of value is where it can be shown that the transfer was not intended to confer a gratuitous benefit on any person.  As I understand the position, the contributions to the Funds are made by the individual for the purpose of providing him with a pension and no gratuitous benefit is intended to be conferred on anybody else.  If a member seeks to benefit from the exclusion of a disposition where there is not a transfer of value it would be wise for him to be ready to provide some evidence should it be called for by the UK tax authorities that the member expects to benefit personally from the contributions by way of a pension or increased pension rather than merely generating a fund which will pass to his dependants after his death.

In addition it is highly likely that contributions will be exempt transfers being made out of the individual’s income, satisfying the following tests:

1. that the contributions will be made as part of his normal expenditure, and
   
2. that taking one year with another they will be made out of his income, and
   
3. that he will be left with sufficient income to maintain his usual standard of living.

For these reasons I do not consider that any UK inheritance tax will be chargeable on a UK domiciled member on this contributions to the Funds. 

Will UK IHT be chargeable on the death of a UK member who is UK domiciled and who made transfers of property to the Funds?
The answer to this question depends upon whether the Funds satisfy the conditions which (as far as is relevant) apply to a registered pension scheme and to any other specific superannuation fund .

It is clear that these Funds will not be registered as a registered pension scheme.  However, in my opinion the Funds will fall within other specific superannuation funds dealt with by the UK rules for the reasons explained in detail in the answer to question 3 below.

The members’ interests in the Funds are eligible for inheritance tax relief with the result that none of the assets in the Funds would form part of the estate of a deceased member and no inheritance tax would therefore arise on his death.  Similarly, no charge to inheritance tax arises on payments made by the trustees of such a scheme in exercise of their discretion to pay a lump sum to the members’ dependants.

The above will not apply where the deceased had power immediately before his death to nominate or appoint the benefits to any person including his dependants.  However, my understanding of the position is that the Funds allow a member to nominate a person as a dependant but he has no right or power to provide benefits to any person; that power resides entirely at the trustees discretion.  Accordingly, the above exemption should not be impaired.

It is possible that by failing to exercise rights under the scheme a member may be regarded as making a transfer of value.  Such a transfer would be disregarded in respect of registered pension schemes but this relief is inapplicable here as the Funds will not be registered.  However, a general relief is provided by a published Capital Taxes Office letter which confirms that where a member fails to exercise his rights, a transfer of value will not occur in genuine pension arrangements, but only where there was a deliberated intention to increase the value of another person’s estate.

If for some reason the Funds were found not to satisfy the above requirements it would simply be a discretionary trust without any particular relieving characteristics.  This would not make the contributions by the member to the Funds chargeable to IHT because they would no doubt continue to satisfy the exemption for normal and habitual gifts out of income.  However, the amounts contributed would remain in his estate and chargeable to IHT on his death because they would be gifts with a reservation of benefit having regard to his clear opportunity to benefit from the trust.  (This would not apply if they could be disregarded as gifts which were not intended to confer a gratuitous benefit on any person:  see question 1 above).

Where the contributions to the Funds have been made solely by the member’s employer at the employer’s discretion, the value of the Funds would not form part of member’s estate or be chargeable to tax on his death as he would merely be a discretionary beneficiary. 

(I would add that if the member is not UK domiciled the above considerations would not have any significance as the Funds, whether provided by his own contributions or those of his employer, would contain excluded property.  His interest would be an asset situated outside the UK and therefore excluded property).

Do the Funds satisfy the definition of a "registered pension scheme" pursuant to Part 4 FA 2004 or a section 615(3) superannuation fund and consequently maintain their status as FURBS?
The Funds will not be registered schemes in the UK and therefore will not be a “registered pension scheme”.

For a superannuation fund to be a section 615(3) superannuation fund, it must be:

1. bona fide established under irrevocable trusts in connection with some trade or undertaking carried on wholly or partly outside the United Kingdom;
2. have for its sole purpose the provision of superannuation benefits in respect of persons’ employment in the trade or undertaking wholly outside the United Kingdom; and
3. recognised by the employer and employed persons in the trade or undertaking.

For this purpose any incidental duties performed in the United Kingdom are treated as performed outside the United Kingdom.

In my opinion the New Zealand and Singapore Funds will both be regarded as section 615(3) superannuation funds providing the benefits relate wholly to employees whose duties are performed wholly outside the UK. 

Accordingly I would recommend the scheme rules be revised or supplemented to provide that if a member commences duties of his employment in the UK, no contributions would be made to the Funds for him by the employer as long as that status continues.  In that case the conditions of a section 615(3) superannuation fund would continue to be satisfied (as far as he is concerned) and he would not be exposed to any charge to income tax on the contributions.

Unless the Funds are approved in the UK, they will necessarily be funded unapproved retirement benefit schemes (FURBS).  Maintaining their status as FURBS is not particularly important as that is merely a generic term; what is important is to continue to satisfy the conditions of a section 615(3) superannuation fund so that the non-transfer of value exemption is secured.

What are the UK IHT consequences of transfers out of the Funds and into a testamentary trust that is located outside of the UK?
In principle, no inheritance tax consequences should ensue because the assets in the Funds do not form part of the members estate for IHT purposes - providing of course he has no right or power to appoint any part of the Funds to third parties (see Question 2 above).

If the trustees exercise their discretion to make a transfer out of the Funds to a dependant of a member no IHT consequences arise.  The position would be the same if the trustees were to exercise their discretion to transfer assets from the Funds to a trust established by the deceased member by his Will, providing that those beneficiaries who may receive amounts from the trust are within the class of persons entitled to benefit from the Funds. 

I would emphasise that once monies have been transferred to a testamentary trust for the benefit of the member’s dependants, they cease to qualify for any of the protections afforded to pension funds and the normal trust regime would apply to those monies. 

 

P S Vaines
Squire, Sanders & Dempsey
5th December 2006

This advice is provided by Squire Sanders & Dempsey in connection with the specific issues raised in connection with UK taxation. This advice is of no further application and does not represent a general explanation of the issues or a full review of the subjects covered. The advice should not be relied upon in any other context by any person. Professional advice should always be sought before any action is considered based on the above and no liability is accepted by Squire Sanders & Dempsey or any of its partners consultants or employees in respect of any action which might be taken or refrained from being taken by any person as a result of the contents hereof. No reproduction of the whole or any part of the contents of this advice is permitted without the prior written consent of Squire Sanders & Dempsey.