Readers’ forum: Civil case

Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on the civil service death benefit part of a deceased person’s estate.

‘Our client died unexpectedly. He was still working as a civil servant, was unmarried and had no children.

Our late client’s estate is modest and is less than the inheritance tax nil rate band. However, his family have been advised there is a death benefit to be paid from the Civil Service pension scheme. If this amount is part of the estate it would take it above the inheritance tax threshold.

The family were advised that the managers of the scheme had no discretion to pay the fund to the siblings and have subsequently received a letter saying it would be paid to the personal representatives and a grant of probate would have to be produced.

We have been advised that the pensions reforms do not apply to Civil Service pensions and we cannot find anything in those pension rules that helps – they say inheritance tax ‘may’ be payable.

We have found a section in HMRC’s Inheritance Tax Manual (at IHTM17058) which is headed ‘Pensions: IHT charges: Crown, local authorities and overseas governments’.

Without quoting any authority, this states: ‘A repayment on death of contributions by civil servants who were neither married nor in a civil partnership in respect of widow’s or surviving civil partner’s pension are included in the estate.’ However, it then continues: ‘Death benefits payable on the death of a serving civil servant are not included in the estate.’

The letter received from the pension managers refers simply to ‘a lump sum death benefit’.

Can Taxation readers advise? We are anxious to establish whether payment can be made without a tax liability.’

Query 19,214– Petworth.

Reply by Terry ‘Lacuna’ Jordan, BKL

Failure to nominate a recipient of the payment will result in a liability

Petworth’s late client was a serving civil servant who died without leaving a spouse or children. Although the pre-July 2007 final salary Civil Service pension scheme was non-contributory (reflected in salaries lower than in the private sector), nominal contributions for widows and widowers were repaid as an additional lump sum on retirement if the person was single at retirement, subject to a one-off deduction to provide for a widow’s pension should they marry after that date.

If the client was a member of the classic scheme, the additional lump sum would normally be equal to two years of the deceased member’s pensionable earnings. The guidance states that, if the deceased had nominated someone as the recipient, the payment would normally be made to that person. If the deceased had not nominated anyone, the payment would be made to the personal representatives.

Pensions are dealt with in IHTA 1984, s 151. Dymond’s Capital Taxes at 11.544 states:

‘In summary the overall effect of s 151(4) is to bring within the member’s death estate in s 4 any benefit, whether in the form of a lump sum (eg a sum payable to him on his retirement, or a sum representing a return of contributions on his death before reaching retiring age) or of annual payments (eg pension payable to him, or the balance of such a pension payable for a minimum period after retirement where he dies within such period, or a pension commencing on his death), under a scheme where either:

  1. the benefit is payable to him or his legal personal representatives as of right; or
  2. he had a general (not a limited) power to nominate anyone he wished as beneficiary, whether exercised or not.

‘If he had a power of nomination restricted to a specified class of persons which did not include himself, his failure to exercise the power irrevocably in his lifetime will not give rise to a tax liability on his death unless under the rules of the fund or scheme the benefit then accrues to his estate.’

Accordingly, the client’s omission to nominate a recipient of the payments in the event of his premature death has unfortunately resulted in an inheritance tax liability.

The article is also available to subscribers on the Taxation website.

For more information, please get in touch with your usual BKL contact or use our enquiry form.



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