Seaton says
In his pre-budget statement of 6 December 2006 the Chancellor proposed additional tax charges on funds remaining within a pension scheme in respect of a member who dies whilst drawing an Alternatively Secured Pension (ASP). This move is designed to prevent people being able to pass wealth down through the generations via their pension in an attempt to avoid Inheritance Tax. The Chancellor also identified that Scheme Pensions were being used to avoid Inheritance tax.
At the Committee stage of the Finance Act 2006 the Standing Committee was made aware of the Counsel’s opinion prepared by Philip Baker, QC. He considered the four charges put in place in the Finance Act 2004, namely the unauthorised payment charge, the unauthorised payment surcharge, the scheme sanction charge and the potential de-registration charge, in the context of the European convention of human rights. His conclusion was that the charges were disproportionate given the potential mischief; that is the tax relief that would be enjoyed as a consequence of investing savings in property, or as a result of indirect investment in businesses. The penalties were much greater than the tax loss and there was no opportunity to mitigate that loss, because the charges were automatic; there was no opportunity for someone to appeal against them. His opinion was that the penalty regime in the 2004 Act could come under scrutiny from the perspective of the European Convention on Human Rights. We believe these additional taxes are an even more blatant breach of the European convention and will be challenged if put on the statute book.
A Scheme Pension is not a device to avoid an Inheritance Tax liability. It was created to allow final salary pension schemes to pay members’ pension benefits. On death of the member and any dependant any surplus reverts to the trustees to be used to provide benefits to other members. Making a tax charge on such a notional fund would further exacerbate the funding shortfalls in final salary pension schemes. Any Scheme Pension must be calculated to assume that at the member’s normal life expectancy the fund will be extinguished. Therefore the basis of the calculation must be to assume there is no fund remaining on death. Whilst the pension is being paid, income tax is paid on the pension. Should a member die earlier than predicted then there will be a surplus for redistribution. However, no one dies to avoid tax! We will be making our points robustly to the Chancellor on this matter.
For most people looking at pension arrangements, the age of 75 and death thereafter is a long way off. What is important today tends to be flexibility.
The proposals are not law and must be put through Parliament in the next Finance Bill. This will not receive Royal Assent before July next year. It is possible that industry pressure may convince the Chancellor to make changes.
It is extremely regrettable that after four years of debating pensions simplification, the Chancellor has seen fit to keep tampering with the rules. Rowanmoor Pensions is committed to providing the most flexible innovative pension structures possible and will change rules within the legislation to ensure our clients maintain maximum choice and flexibility.
13 December 2006
