Video IHT and pensions: preparing clients for April 2027

(0:00) Good morning everyone and thank you for joining us for today's webinar, IHT and Pensions, Preparing Clients for April 2027. I'm David Weaver from our communications team and I'll be hosting today's session. We're delighted to have so many of you with us for what promises to be a practical and informative session and I'm pleased to welcome our speakers, Elaine Cruickshank, Tax and Trust Manager, and Martin Haggart, Technical Manager for Pensions at Aegon. Just before we get started, a few housekeeping points. This webinar is being recorded and the recording will be made available in the coming days so you'll be able to revisit the session. Please use the Q&A or chat function to submit any questions and we'll do our best to answer towards the end of the session. And for those of you that are collecting CPD, the CPD certificate will be shared in the chat towards the end of the session. So please remember to download that during the session. And with that, I will hand over to Martin and Elaine to get us started.

(1:08) Perfect. Thanks very much, David. Very good morning to you all. I'm delighted that so many of you could find the time to join us today. Elaine and I thought we would run this session prior to the kind of main holiday season, just to try and bring you up to speed with the latest material that's arrived from HMRC following a number of additional workshops that have taken place, where we have been given a bit more detail and a bit more technical guidance, not the full technical guidance, but some more information about verification of personal representatives, about withholding notices, about the direct payment scheme.

(1:40) So we thought we would try and kind of just bring you up to speed with what has been delivered. But first, before we get there, actually, I thought it was worth just having a look at some of the kind of communications that have come out from the FCA recently. So it's fair to say that the whole bereavement process is under review at the moment. The FCA is conducting some research with advisers asking some information about communications that have been issued to clients, about staff training, are people properly skilled and being able to deal with bereaved customers, looking at identifying vulnerability.

(2:19) And also the application of continued application of fees and charges, where that engagement with the client has automatically ceased because the client has died. And thereafter, you're then perhaps setting up a new engagement with the beneficiaries to kind of help them through this process and to decide where those benefits go and that will become really relevant given the extended period that we can see as a result of many of these cases going through the IHT process and having to collect information and report to HMRC and then perhaps direct schemes to pay charges. And at the same time, there's also an issue in terms of FCA's identified that they believe pension firms should be doing more for typically legacy customers, people sitting in old personal Pensions, freestanding AVC policies, retirement annuities, buyouts, etc. And actually the value there, 500 billion sitting in something like 17 million. Non-workplace Pensions at massive, massive kind of scope for some review there, and one of the things that I've identified in the past is that, yeah, FCA looking at kind of costs and charges and kind of product development and under these old contracts, one of the thing I've noticed is that many of these legacy contracts don't offer all of the death benefit flexibility that could be available. And that's something that I think we need to look at as an organisation, but also when you're looking at clients and all come on to identify some of the problems that we commonly see.

(3:57) So it's all about avoiding poor outcomes. Now, consumer duty have been in since July 2023. Speculation at the time was that the financial ombudsman would look at them, they would look at this in terms of, sorry, the FCA would look at the financial ombudsman statistics to determine whether or not there aren't any poor outcomes. And the Ombudsman website actually has a very useful search facility where you can put in a keyword and it will tell you how many determinations have been made in relation to that keyword and you can put in whatever time frame that you want. So just running it to yesterday's date and just putting in death in the as a keyword, came up with something like 535 rulings just in that 12 month period. Now focusing it right down to Pensions, it's still over 300. So it's a massive area where there's just existing frustrations in the whole process, benefits, death benefits going in the wrong direction that some of the proposed beneficiaries, possible beneficiaries that are expecting. So complaints being made to the Ombudsman because of that. And actually interestingly, the first couple of cases on that list when I did that report was for Scottish Equitable, so Aegon cases.

(5:13) I'm pleased to say that neither were upheld. One was a buyout policy, so there was no discretionary disposal anyway, and the benefits were paid to the estate as of right. But the other one was a case where, yeah, there was a nomination in place, but it was very, very old. And the information that we collected at the point, suggested that there was a new relationship, a new marriage, and there was a dependent children of the second marriage, and they hadn't been nominated, but we felt on the balance of information that was submitted to us, that actually that person was deserving of part of the benefits, which was then complained about by the first set of beneficiaries.

(5:52) So the ombudsman looked at it and said, no, we'd followed the right procedure, we'd collected all relevant factors and the decision that we made was not a perverse decision based on that information. So that case was neither complaint was upheld. But as far as I'm concerned, there are no winners there. That's kind of a long, lengthy process. You've got complaints, you've got disgruntled beneficiaries, you've got a disgruntled adviser because it's taken so long to get through that process. So I think it can be so easily avoided just with kind of ongoing attention to that matter.

(6:26) Your clients will have built up a whole range of Pensions across their working life, as shown on that 500 billion in non-workplace pensions. You know, they will have pensions and old plans that perhaps have not reviewed. And I think that's something that we do need to we need to call out, because often that is the complaint that the pension arrangement that they're in doesn't offer all of the death benefit flexibility that the beneficiaries expected. It could be an old buyout policy where the benefits are paid to the estate as of right, unless there is a trust in place, in which case it would go to the trustees. Or it could be that the plan just has limited death benefit options, just a lump sum only.

(7:06) There is discretion and it's just paid to the chosen beneficiaries, which is common for personal pensions and group personal pensions and stakeholder. There might be wider death benefit options. It may offer continuation of drawdown, but it might just be for dependents only, which was the position prior to April 2015 you could nominate a survivor, that person had to be a dependent. So unless the scheme has gone back and then updated that to allow for nominees and successors, then that could still be a restricted offering. Some schemes operate on a binding nomination basis, so again, no discretion there, the scheme just provides death benefits to the named beneficiaries schemes that, on the face of it, seem to offer all death benefit flexibility. But if you then drill down to say, okay, if I've nominated a minor beneficiary, will that minor be offered beneficiary drawdown? because it could be, yes, they would recognise that minor to pay a lump sum, but not for actually setting up a drawdown contract for that minor. And that could be really important, especially when looking at intergenerational transfers, perhaps funds going from a grandparent over 75 down to a grandchild. Now, if that's paid as lump sum, then that grandchild could be paying tax on it, could be paying higher rate tax on it, which could obviously be easily avoided should that contract offer beneficiary drawdown. So looking at the contract itself is the first step.

(8:34) And that's where there's a kind of, we find that a real lack of consumer understanding on that. That discretionary disposal, clients do not understand why it's there. Research shows that people say if you put a nomination in place and name an individual, they expect, they fully expect the death benefits go to that person. And that might not happen because of discretionary disposal.

(8:55) The scheme collects information and makes a decision based on the factors that are disclosed to it. Individuals think that the will impacts on the pension and it doesn't. The will sits completely separate and the pension scheme is under its trust deed and rules. There's discretionary disposal there. We would ask to see a copy of the will, but that's just to help us form a complete picture of the client's circumstances. The will doesn't override the trust and rules of the pension scheme. And individuals don't recognise the importance of having a nomination in place and keeping it regularly reviewed and updated. And also have some sympathy for them because every scheme operates with its own different nomination form. So if you've got different contracts, then you're looking at doing a number of different nominations and what is this one binding is up and non-binding and how do I cover things like I want benefits to go to this person should I should another individual not be in existence or choose not to receive benefits. So there are contingencies and if they want to cascade so it goes to this individual or if that person doesn't exist then it goes to these individuals. So doing that kind of cascading wording I do have some sympathy that clients will need some help in order to achieve what they wish. But this whole risk of inaction is something that we need to try and get over. We need to encourage people to review their death benefits and update them as frequently as possible.

(10:22) But some of the common issues that we see is that, yeah, no nomination in place or then there's a nomination that's not been reviewed for some considerable time. Also, if they've put in like notional percentages, then we need to get a notification that they wish to adjust the percentages before we exercise our discretion. Because once you've done that, you've effectively awarded the benefits to that person. If they then try and give up that benefit, they've given up something to which they've become entitled to. So that's not ideal. We can take into account any requests made to change the percentages, but it has to come fairly early in the process. You really can't tell us enough information on the nomination and on the separate form here, this beneficiaries form which we would issue at the point of death. That aims to collect as much information as we feel should be appropriate to be able to make that decision. Sometimes we have to go back and get more information, but generally the information contained on that beneficiaries form should help us with the nomination in place to be able to decide who the beneficiaries are.

(11:29) So yeah, we would recognise that any information that's supplied to us, requests to change the percentages, or if an individual is to be excluded, then tell us that that person is to be excluded because perhaps they're going to be awarded benefits, non-pension assets through the estate. Whereas if we collect information and say if there's a possible beneficiary there that's not been nominated, why is that? It's just going to help ease the process, speed up actually. If we can say, okay, that individual is going to be receiving non-pension assets, we've been told that, we can kind of discount them from receiving death benefits through the pension.

(12:04) Beneficiary is based overseas. Yes, they can receive a lump sum death benefit, but we can't actually offer beneficiary drawdown to someone who's outside the UK. Careless wording, yeah, we've seen that happening before where the individual has kind of restricted the availability of the benefits to other beneficiaries because the wording that they've used has been kind of restrictive. So yeah, we can help with that if you have cases where they've got non-standard wording. And radio silence is one that, yeah, what I mean by that is that we will receive a nomination and then nothing happens thereafter. Now, you might be having these conversations with your clients, but nothing's going to filter through to us. So we don't know what's happened unless you can take action to let us know. So if I can just going to ask you for some feedback, there's not a poll because actually, there's not a wrong answer here, but I would be very interested to know from you that if you do that client review and you look at the nomination and you see actually there's no changes to the beneficiaries that have been named there, what action do you then take? Do you just record that conversation on the client file?

(13:16) Do you complete a new nomination form with the same beneficiary details, but with a current date, or do you send a communication to the scheme to confirm the discussion has taken place and that the beneficiary details are still accurate? Really interested in your feedback here. What do you do? Because in my experience of doing these kind of sessions, the first option is the one that's most common. I find that you have that record on file and you keep it on file, but actually nothing is filtered through to the scheme. So when we pick it up, then we don't know what the situation is and we don't know that that regular review has happened unless you then can provide us with evidence. Yeah, I've had that discussion yearly and those beneficiaries are still up to date. I would recommend that you consider options two and three. Now, if you don't want to complete a new nomination form with the same beneficiary details and with a current date, then certainly send in that communication to us. Just to say you've had the discussion, the nomination, the beneficiaries are still up to date, still accurate. Now, seven people will be like, okay, that's fine, we'll just keep it on record.

(14:24) But actually, that's really, really useful from a claims perspective, that they can pick up that case and say, okay, we know that that's been regularly reviewed. There's a pattern here, that nomination of beneficiaries is still valid and it's much easier as an exercise to say has anything happened in say the last six months to change that nomination as opposed to has anything happened in the last 10 years. So this is not really for our benefit, but this is to kind of make sure that the beneficiaries are properly up to date and it's much more likely that we will choose the beneficiaries that the client actually wants and to help speed that whole process, which is going to be really important as we go forward with these changes and to IHT and Pensions.

(15:15) There has been a kind of an uphill struggle. We've had umpteen different workshops that Elaine and I have joined HMRC with about 90 or 100 different other attendees as well from schemes, large schemes from estate practitioners, from other providers. So the whole range has kind of contributed to this exercise and we are kind of really getting close now to the finishing line. And thankfully, HMRC has now started to deliver more information. So we had technical guidance, something like about 11 pages answering kind of common questions that came up in the consultation process, which is good. Draft provision of information regulations, which we're going to kind of cover in a second. How we verify the personal representatives have given us some more information on how we do that. Some further detail about what needs to be contained in a withholding notice, when they can be submitted, who can submit them. and also for direct payment notices as well.

(16:15) At the same time, we kind of clarified the charity exemption. So yes, three different components, joint property, settled property and general. So death benefits going from Pensions would come under the general component. Those 3 components are calculated separately. So 10% of the baseline going to charity. Then the IHT payable we'd go from 40 down to 36%. So there's a number of advice issues in there and looking at the different categories and it is possible to merge the components should that be appropriate. We can provide more information on that later date. I guess a normal expenditure, they didn't really address that. They kind of made reference to it, but what they'd said was simply that nothing has changed.

(16:58) Nothing will change as a result of IHT and Pensions to the existing rules on gives a normal expenditure. So I guess the positive there is that they haven't confirmed that taking tax free cash and regular income wouldn't qualify. So, but you would expect if that was the case, they would have confirmed that at that point. So you're still looking at those three key tests.

(17:20) So just in summary, so not a new terminology, kind of notional pension property, what does that mean? Well, it's not that your value, it's not that your pension becomes part of your estate, it's actually the value of your pension property is included within the estate calculations. So as I said earlier, the pension sits separate to your estate is set subject to its own trust and rules, but the notional pension property, so its value, is then included as part of your estate assets. Excluded benefits with DIS lump sums are out of scope, as are charity lump sums and dependent scheme Pensions and joint life annuities. Exempt beneficiaries. Now, this is something I want to going to dip over to Elaine to cover, because, yes, both civil partner and charity exemption does continue, but it's on the basis that the individuals are long-term UK residents. So, Elaine, can I just switch over to you just to confirm who is liable for IHD?

(18:23) Of course, Martin. Yeah, do you want to go? Yeah, so just a quick recap. I'm sure that you all clocked this change, but from the 6th of April 2025, from an IHT perspective, we've moved away from the concept of domicile and to a new residency based test and that residency based test is based on the statutory residence test. Now HMRC have a lot of tools and guidance available on their website to help clients ascertain whether they are UK long-term resident or non-UK long-term resident. But no matter what the residency situation of a client is, they are subject to UK IHT on UK cited assets. And as far as non-UK cited assets are concerned, these are subject to UK IHT if the individual has been UK tax resident for at least 10 out of the previous 20 tax years immediately before the year of the chargeable event. So UK tax resident for at least 10 of the previous tax years before death or before making a chargeable lifetime transfer, for example.

(19:31) And if someone wants to shed UK long term residency, then actually if they've been in the UK for 10 to 13 years out of the previous 20 years, then they'll have to be overseas for at least three tax years before they shed their UK long-term residency and there'll be an additional year added on to that tax tail for every additional year that they've been UK long-term tax resident. So this all has, this is all a bit more complex and as far as space exemption is concerned, if assets are passing from a UK long-term resident spouse to a UK long-term resident spouse, then the spouse exemption applies. But if assets are passing from a UK long-term resident spouse to a non-UK long-term resident spouse, then the spouse exemption is limited to 325,000. That non-UK long-term resident spouse can elect to be treated as long-term UK resident for the purposes of IHT. But again, it would then take them 10 years, the maximum tail of 10 years to actually shed that UK long term residency by moving overseas after the election had been made.

(21:04) True, not straightforward then, Elaine.

(21:05) No, really not straightforward, but I just thought it was worthy of just bringing this in because it was a recent change that maybe had passed some people by. So I just thought worthy, no, because it's going to become far more relevant again about spouse exemption, whether it applies to the pension assets, for example.

(21:09) Yeah, definitely. Yeah, and for charity nominations as well, that has to be a UK registered charity on the Charity Commission website.

(21:27) That's right.

(21:31) Cool. So these were the kind of numbers that were taken from the initial consultation, some like 49,000 estates going to be affected by these changes to IHT and Pensions. And then we can argue whether or not that's properly reflective of the numbers who will be prospectively affected in the future. I think what we can't argue is that every estate is going to have to take action even if it's just to say we're not affected, we're still going to have to go through this process of identifying what pension assets are there, collecting all other assets in the free estate, doing all these kind of calculations to say, okay, I do need to do a report to submit an IHT account to HMRC and then seeking more information from the scheme or not, whether or not. So every estate is going to have to face up to these new provisions to be able to identify pensions and do these kind of evaluations, even if it's to confirm that they're not affected.

(22:20) So I wrote an article on this recently, just for thinking of new material that's come through. And I think as a very minimum, what you need to do is with each client, you're going to check the ones who are affected or likely to be affected, is there a valid will in place? According to the Money and Pensions Service research that was done last year, I think it was, started 2025, It was less than 50% of people had an active will in place, which is kind of frightening. Do the executives, or the named executives were first and foremost, do they even know that they've been named? Because there's no obligation on the individual to tell that person they've been named. You would hope that that has happened, but there's no legal obligation to do that. So are they clear on the responsibilities and willing to act in this capacity? Or do they want to consider perhaps appointing a specialist professional to undertake these new duties?

(23:14) Another minimum I'm saying is like, okay, look at all pension assets. You're going to have to keep clear records of all pensions to enable your personal representatives to be able to then go and seek valuations and go through the verification process. You're going to have to be able to have all these clear records available to them. And how do you do that? And can this digital age paperless statements, etc. So having clear records is something that must be put in place. And if there are multiple Pensions, then you need to consider what are the implications of your personal representatives in doing all of these different tasks for all of these different schemes. And if you do then want to consider things like consolidation, perhaps it might be appropriate. There may be good reasons that Pensions are being kept separate if they're valuable, protected tax free cash or protected pension age 50 or lower, because the 55 one can be retained on transfer, it could be guaranteed. So any number of reasons for Pensions being kept. separately. But on review, perhaps there is no obstacle to these benefits being brought together and that might help the personal representatives have a much easier process in future and also will help the client in terms of keeping the nominations in place rather than have multiple Pensions, multiple nominations, changing percentages as appropriate. It might be easier if those benefits are held on one pension arrangement as one nomination, and that's going to be much easier for them to achieve.

(24:42) And why is that? Why am I saying that you should do all this? Well, the process, if you look at it, looks exceptionally complicated. Now, all of this has to take place within a six month period has to be reported and tax paid by the end of the six months following the end of the month of death. So you're looking at that very start of that process. I'm not going to present the whole slide, you'll be glad to know, but just looking at some kind of pain points here.

(25:10) So the first stage is that the pension scheme is notified that the person has died. When does that take place? Might not be immediately. And so you have to go through that validation process, which I'll go on to just have a look at and then get that valuation of those benefits, bring it together with other non-pension assets to decide whether or not an IHT report is going to be required. Then seeking specific beneficiary details to be able to work out and put this information into a promised HMRC calculator that they said will be ready in time to be able to identify is there IHT due? Yes, there is. Then how are you going to then pay that potential charge? There is this prospect of the personal representatives or the prospective personal representatives directing the scheme to withhold up to 50% of the taxable benefits.

(26:02) So benefits going to non-exempt beneficiaries, they can put this notice in to say we want you to hold back 50% of those benefits whilst we ascertain what the IHT position is and decide how it's going to be met. And that has its own implications. We don't want to see that as standard, certainly. We don't want to see all cases having these withholding notices in because the non-exempt beneficiaries are going to have to wait some considerable time before those benefits emerge. And actually, those funds if they've been put into cash in the meantime, they're sitting outside the market for quite some considerable time whilst this all plays out. So we'd not like to see that happening on a standardised basis, but only for those key cases where perhaps the beneficiaries of the estate are different to the beneficiaries under the pension scheme. And they want to make sure that the sufficient funds there are retained within the pension to meet the IHT charge that's due in relation to those pension benefits,

(27:02) The House of Lords made a number of very sensible recommendations with this legislation in mind. They said that actually what you should do is because of that six month period is going to be very difficult for the short term while schemes adjust to these new provisions. So actually for Pensions why don't you extend it up to 12 months for a temporary period? That was that was rejected by HMRC, not unexpectedly. The Lord's also said that what you should do is not apply interest to late payment for, I think it was for a period of two years. Again, that was that was rejected by HMRC. Interestingly, in all the workshops, they have run every case, every example that they've given and I don't think I'm betraying any confidence here. Every example I've given has IHT plus interest, so they can see the difficult task that lies ahead for the personal representatives to meet their new duties.

(27:56) And one of the other things that they suggested is that in order to give the personal representatives a fighting chance of doing this whole exercise, give them delegated access to information that's held on the pension dashboard and also extend the information on the pension dashboard to include drawdown benefits as well as just uncrystallised. Unfortunately, HMRC rejected that suggestion as well. So they've made a couple of small changes in relation to that House of Lords report, but some of the major things that we would have liked to see, the sensible things, unfortunately, were not taken forward. So instead of giving them delegated access, HMRC just suggests that the personal reps keep good records and that the personal representatives or the prospective personal representatives just examine the person, the deceased person's papers, records, bank accounts, speak to relatives, business partners, etcetera, just to identify those Pensions.

(28:57) I think that's massively difficult unless clear records have been retained. Now, if it happens that the pension asset is identified after an IHT account has been settled, then the personal reps will still be involved in getting valuations and reporting that to HMRC. So it may need corrective submission on that account. But actually, the personal reps won't be personally liable if they have applied for clearance. So they can say, look, we've tried our best to identify all possible assets here and apply for clearance. And if the HMRC then grant that, then any additional asset that's identified thereafter, then HMRC would then seek to recoup any IHT directly from the beneficiaries. But unfortunately, as I say, pension dashboard is not going to help in this whole process of identifying Pensions. So what my argument is that the consolidation may ease the burden as a result. So it's something that really needs to be considered.

(29:56) So in terms of verification, so HMRC has said that, okay, you'll have cases where there's a will, in which case get a copy of the will and then ID the person that's named, assuming that they have given their formal acceptance. Now, if there's multiple executives, then you need to find out if they're acting independently or jointly and if they're acting jointly, then we have to ID all of them. But if the individual has been unaware, is not willing or is unable to act, then you treat the case as if there is no will, which case you're then IDing the person who's claiming to be prospective personal representative who then confirms that there's no will and explain in place. So they have to explain their right to claim that role and what their relationship is to the deceased person.

(30:46) Now there's a kind of natural priority order across the very similar across the different jurisdictions in the UK where spouse or civil partner would ordinarily be expected to fulfill that role, but if you don't want to do that, then go to the children, grandchildren, and otherwise to parents and siblings. But you could have cases where you've got competing parties, competing siblings, for example, saying that we're going to be appointed, we're going to be appointed, and then the scheme is going to have to react to both of them, provide both sets with information.

(31:16) They will then have to apply to the courts to for grant administration, which is going to take time and the court may require an insurance bond to guarantee that they would administer that estate and distribute the assets accordingly. So all that's going to take some time. Elaine, we're doing that already for ISAs and GIAs, aren't we?

(31:41) Yeah, that's right. We do have processes in place already, you know, to seek a copy of the will and depending on the size of the ISAGI combined, whether we'll settle under an indemnity, you know, a small estates indemnity or whether we actually ask for the grant of probate.

(32:00) So it'll be an adapted process, yeah. The thing is on this side, it's like, well, okay, on the left hand side, if there's a will in place, it means that the personal reps can very quickly move to get the valuations and move forward with the whole process. Whereas on the right hand side, where there's no will, that's going to take time to set up and look at these kind of prospective claims. Decide who is the relevant party that's entitled to receive this information before they can then move forward.

(32:27) Then we've got withholding and direct payment notices. So will the personal representatives or the prospective personal representative feel it's appropriate to send a notice into the scheme to hold up to 50% of the benefits being payable to the non-exempt beneficiaries? That would expire after 15 months of death. There's going to be an HMRC template, although schemes are going to be able to develop their own. But again, if there's joint, if there's multiple personal representatives acting jointly, then we're going to have to get collective agreement. And as I said earlier, if you've got multiple pensions, then you're looking at the prospect of multiple notices going to multiple pensions, which then might have to be collective agreement if it's personal reps acting jointly. So Complicated, certainly.

(33:12) And then you've got direct payment notices where the personal reps or the beneficiaries, but not the prospective personal reps, can direct the scheme to say, look, there's a tax charge here, we want the scheme to pay it. If it's more than 1000 pounds, the scheme must then agree to that, providing A valid notice is supplied and identify who they are and the tell the scheme how much is payable, so it's itemised, IHT, interest and then total. Again, if you've got multiple schemes that you're looking at, the prospect of multiple notices being submitted. We looked at client segmentation before, there are some obvious categories that people top of the list, over 75 who are non-crystallised, who I suspect will already know have addressed that in terms of taking the tax-free cash out rather than going to run the risk of tax-free of kind of IHT and income tax on the benefits.

(34:07) Running down the list, inherited drawdown, so even the individuals who had received benefits, got beneficiary drawdown, they've been told actually there's no tax on this because the client died before 75, they will all have to be revisited such that yes, actually you've said they were going to be tax free, but actually that's now going to be included within your estate calculations on death. So do you want to take any action with that?

(34:31) The fragmented Pensions, I think this is a big kind of danger. You've got Pensions in a number of different places. You've got to give your personal reps a fighting chance of collecting all this relevant information, seeking valuations. How long is that going to take? Verification process, getting through that. How long has the scheme got a different verification process than Is scheme A different from scheme B? Do they have additional requirements? All of this is going to take time to do. So consolidation, I think, is something that really needs to be considered.

(35:01) In terms of advice issues for Pensions, the planning horizon is getting very close. You're looking at less than nine months now. When we started, we had 2 1/2 years, but with this information now just landing, yeah, I think we need to look at this kind of urgently. Nominations have always been important, but I think will become even more so. Now, nominating our special civil partner will certainly avoid IHT initially but it just delays the issue to the second death. Is there something more appropriate that could happen? Would you name another individual? Would you name a trust, for example? Cover trust just in a second. On the plus side, there'd be no further barrier, no future barrier to transfers contributions made in the knowledge of ill health. Although for the nine months that's remaining, that's still a live issue.

(35:50) But consolidation, this whole process, that's something as we've talked about, needs to be considered. But the use of bypass trust, there's been a suggestion that there'll be a renaissance and bypass trusts because of these new provisions. Now that could be for deaths prior to April 2027, so no IHT, and post April 2027. Certainly for schemes that are DIS only meet those conditions because they are exempt from IHT applying, so your money could go into the trust to then avoid future any future IHT as well. Or it could be for the available portion of the no rate band. So client may look at their circumstances, look at their pension assets, non-pension assets, how much of the no rate band would likely apply to the scheme and then nominating another beneficiary to receive that portion and that portion could be going into like a bypassed trust.

(36:45) So what is a bypass trust? Very briefly, it's a discretionary trust that sits outside the pension scheme. It's normally a token value set up, for example, everyone is 10 pounds. And it just sits there, the individual nominates that trust to receive any lump sum death benefit. And it's been used in the past for kind of complex family circumstances or where there's a desire to restrict the availability of the benefits to a certain minimum age, which you can't do through the pension, but you could do through the trust. But also might, as I said earlier, might be useful now for IHT planning to avoid IHT on the second death or subsequent death.

(37:23) So the benefits going to the trustees would still be included because they're non-exempt, so it would still be included within the calculations and there's no spousal exemption even if the spouse ultimately benefits because the benefits are going to the trustees as opposed to the spouse. But there has been a recent relaxation on trust registration. And that was brought about by the very handily titled Money Laundering, Terrorist Financing and Transfer of Funds, information on the payer regulations. And so that's kind of brought in a de minimis level for certain trusts. So subject to the crude value not exceeding 10,000 pounds, no income tax being arising during that year, and you're only having one of these de minimis trusts in place, then you wouldn't have to register that particular trust, which is going to be a benefit to avoid having to do that for each and every small value trust.

(38:16) But the periodic charges and the exit charges can be complex under these bypass trusts, and I've tried to kind of give an example of that. So, If you've got a case where there was a new plan created in February 2016 with 400,000 via an EPP transfer, if no further contributions have been paid since and the trust was established with 10 pounds. So assuming a lump sum death benefit is then paid to the trust on the 1st of March 2025, the first 10 year period is going to arise in relation to that trust 10 years after it was set up and its relation to that 10 pounds that was used to create it because there'd been no further contributions. So the value of the trust at that point, 440,000. What's the relative value of that 10 pounds now? Well, it works out to be 11 pounds. So the 11 pounds plus other chargeable lifetime transfers is less than the no rate band in this example, so there's no charge. The second 10-year period relates to the EPP transfer. Now, what the provisions are is that you, because it's a trust-based scheme, you track back to that settlement is when the individual joined that original trust based scheme.

(39:24) So that was on the 1st of January 1998. So the 10 year period run from then. So you'd have the first 10 year charge applying in relation to the EPP transfer on the 1st of January 2028. What's the relative value of the trust in relation to that EPP transfer? It's now worth 480,000. So the relative value of that transfer is now the lion's share, 498,988. And you calculate the IHT that's due in relation to that. Now the proportionate charge is 1.93 charge. It was only held for 11 quarters of that 10 year period. So that's then reduced as well. So the charge here, 2,547. So that's for that 400,000 transfer in. Now that, when you're looking at comparing that with benefits being held, continuing to be held in the pension scheme and what is the available no rate band at that stage, then there could be a a sizable benefit in actually looking at a bypass Trust. As I say, for lump sum DIS only schemes and also for the available portion of the no rate band that could be used on first death. But they can be complex, as I say, if it's been used as a consolidation vehicle, it can be complicated because you've got multiple settlements respectively running. But one of the big questions that we get in terms of money going into these trusts is in terms of investment. So what's the investment treatment? And I'm happy to hear we do have an expert to tell us what that position is.

(40:56) Thanks, Martin. I agree with you. I think we will see a resurgence of the use of bypass trust, especially where the surviving spouse, for example, may be impacted by their estate being over the 2 million threshold for the residents, no rate band tapering away. So actually, by using some of the members no rate band and assets passing into the pilot trust or the spousal bypass trust, it will keep the assets outside the surviving spouse's estate and therefore actually protect the entitlement to the residence no rate band. But turning to the tax treatment of investments within a pilot trust, or a spousal bypass trust or a discretionary trust, whatever you like to call it, it's all one and the same thing. Just worth remembering that there were some changes announced in the autumn budget 2025 that will have an impact. The dividend income tax rate remains at the highest rate of 39.35%. The income tax on interest and rental income will increase from 45% to 47% from April 2027.

(42:08) CGT rate, it's the highest rate of CGT that applies, so currently 24%. As far as the annual exemption is concerned, If the member only created one trust during their lifetime, then the trust will get the full trust CGT annual exemption. But if they had created more than one trust during their lifetime, then that CGT annual exemption will be divided by the number of other lifetime trusts that they've created each trust at least getting 1/5 of that 1500 CGT annual exemption. And once we see the increase coming in from the 6th of April 2027 to interest and property income, it's worth remembering though that when the trustees make income distributions out to the beneficiaries, they still have to certify that 45% income tax was paid on the income distributions that are being made to the beneficiaries.

(43:05) So I think with these changes, it's just going to make the management of tax pools more complicated because you'll have dividend tax rates being 39.35%, but the trustees having to certify that 45% income tax has been paid on income distributions and then you'll also have tax on interest and property income being in excess of 45%, so 47% applying. So I think the management of the tax affairs of a discretionary trust are just going to be that bit more tricky given these new changes.

(43:40) So just to highlight how the tax treatment of a discretionary trust works, where a GIA is held within the discretionary trust. So here I've got a situation where James set up a pilot trust with 10 pounds in April 2015, just sitting in the background whilst he was still alive and nominated that he would like unused death benefits to then be paid to that pilot trust when he passes away.

(44:10) So he passed away in January 2020 and unused death benefits of 220,000 passed into the trust. He didn't create any other trust during his lifetime and the trustees have been paying out as much as they can by way of income distributions year on year without incurring additional income tax charges. So, Trust Fund currently comprises corporate bonds with a 5% gross interest yield. So the trustees are receiving 5000 a year from the corporate bonds and OICS with an average 3% gross dividend yield, so 4,500. So as far as the income tax charge for the tax year 2026-27 is concerned, the corporate bond interest 5000 is subject to tax at 45% and the OIC dividends of 4,500 are subject to tax at 39.35%, giving the trustees a total tax liability of 4,020 pounds.

(45:14) So, the net income of the trust then is gross income of 9500, less the tax liability that the trustees incur of 4020, leaving net income of 5480 pounds that the trustees could consider distributing. And the tax pool for the discretionary trust is 4020 pounds.

(45:35) Now, I mentioned before that the trustees have to certify that they've paid 45% income tax when they make an income distribution to a beneficiary, but we saw that the tax on dividends is only 39.35%. So you can see immediately that there's a shortfall there if the trustees were to distribute the full 5,480 pounds of interest. So actually, the trustees will need to do a calculation to work out what the maximum amount of income is that they can distribute if they don't want to have to pay additional income tax. And in this situation, the maximum that they can pay is a net distribution of 4,913. And there'll be a tax credit associated with that of 4,020. And if the beneficiary is a non-taxpayer, they can reclaim that 4,020 pounds tax credit, or they can reclaim some of that tax if they pay tax at less than the additional rate of income tax. But it's worth remembering too that distributions from a discretionary trust are taxed like earned income, so like salary for example, or pension income. So the beneficiary won't be able to offset their dividend tax-free allowance, their personal savings allowance or the 0% savings rate against that income distribution.

(46:56) So as you, I'm sure you'll all agree that that was fairly complicated with the trustees investing in a GIA. So I think that more commonly we'll see the trustees considering investing in investment bonds just for ease of administration in that 5% withdrawals don't have to be included in the tax return. There's only an income tax liability to worry about when there's a chargeable event gain, but actually the chargeable event gain may well not be assessed on the trustees. The chargeable event gain may be assessed on the settlor whilst the settlor is alive and UK tax resident, or also in the tax year of the settlor's death. Or the trustees can always weigh up whether it would be more beneficial to assign segments to an adult beneficiary or appoint some of the trust fund to a beneficiary so that the tax charge falls on that beneficiary at their marginal rate of tax. So there is that control over the tax point, so control over when the chargeable event gain occurs, and control over whom the tax charge falls on, as well.

(48:03) The downside of using a bond though is that you're not generally able to use the trust and or the beneficiaries allowances and the exemptions year on year. With an investment bond, the trustees don't have to worry about being constrained by CGT considerations because obviously switches within the bond wrapper don't incur a liability to CGT for the trustees. And also worth considering with the onshore offshore decision, what the tax status of the beneficiaries are, because with an onshore bond, there's obviously tax within the fund, but a non-tax paying beneficiary won't get any credit for that tax within the fund. They won't be able to recoup any of the notional 20% tax credit. So if the beneficiaries are going to be non-taxpaying, then an offshore bond might be the better solution. And for example, because there is no tax within the fund.

(49:05) So, other advice issues to consider given the extension of IHD to Pensions. I think the primary one for me would be looking at the client's will first of all, and does the client's will need updated? I mean, when was the last time that the client actually reviewed their will? When was the will actually drafted? Was it before the transferable no rate band provisions came in in 2007? Was it before the residents no rate band provisions came in in 2015, for example? Or, you know, will changes be needed now because of the extension of IHT to Pensions? Martin's already covered the complexity of being a PR, so, you know, does the client actually want to go back and look to see that the PRs that they've nominated, that they're happy with them and that they feel that they're up for the job? Do they want to maybe feel a new will in place with different PRs, for example? Are there existing will trusts in place? within the will. Are those will trusts still relevant based on the extension of IHT to Pensions? Do they need revisited and the provisions updated? Know that the value of Pensions are going to be included within the estate, and also I think just given the fact that values of properties and investments have increased hugely over the years, are any percentage entitlements under the will, are they still relevant just given these changes? You know, if the son, for example, is to get 10% of the estate, Is that still relevant now, just given the changes and the increased values that are attributable to the assets?

(50:51) So I think it's a good chance to sit down with the client and just look through the will and just make sure it's still fit for purpose. And then, you know, as far as other solutions are concerned, you know, I still think that we'll see more regular and one-off gifts being made using exemptions wherever possible. For certain clients who may not actually be And that enabled, you know, the health might not be suitable for them to survive the seven-year gifting period. Maybe they'll be looking to invest in assets that qualify for business relief, but obviously we've got the fact now that AIM shares only qualify for 50% relief as opposed to 100% relief.

(51:35) I think we'll see a further uptake in life assurance and just people maybe simply looking to cover the IHT exposure. And I think in all of this, there are tax considerations, you know, when looking at IHT planning that will have to be weighed up, because obviously we'll have to weigh up the income tax charges in extracting funds from the pension to do IHT planning with the IHT savings that will be achieved. They'll also have to weigh up what assets to use for the IHT planning. So currently we have a position where assets get a CGT uplift on death.

(52:20) Now there was even speculation in the press this morning that if Labour do appoint a new leader that this aspect of the tax legislation may change but currently there is an uplift to the CGT book cost on death and that's an invaluable relief. So may well be worth holding on to assets that qualify for that and doing IHT planning with them last, for example. Also having to weigh up both the IHT and capital gains tax implication of making gifts as well. So obviously if shares, for example, were gifted into a discretionary trust, then that gift would be a disposal for CGT purposes as well as a disposal for IHT purposes, but hold over relief could apply in that situation to avoid the double charge. I think, I mean, most importantly, I think just encouraging people to spend their pension, you know, whilst it may seem drastic, is probably one of the best solutions.

(53:26) I keep saying that to the kids, but they're not on board with that, I have to say.

(53:32) I'm not surprised, not surprised.

(53:39) So just if I finish up now, just a couple of final points. Obviously we do know that Pensions will be included within the value of the estate and we could see actually what would the pensions being added to the value of other assets, that the value of the estate actually takes clients over the 2 million taper threshold. So for every two pounds in value over the taper threshold, so a pound of the residence null rate band will be lost. So I think it is really important that clients revisit will trusts that are in place. If A discretionary trust is actually in place within the terms and provisions of the will, then a discretionary trust will generally prevent the property from being closely inherited, meaning that the residence no rate band wouldn't apply. So, worth revisiting for that reason, but immediate post-death interest trusts can qualify to. It can qualify for the purposes of using the residents no rate band. Remember that failed potentially exempt transfers don't count towards the 2 million taper threshold. So lifetime gifting can actually help in order to retain the residence no rate band that would otherwise be available.

(55:00) And also worth considering using the residence no rate band on the first death. So for example, passing an interest in the property on the first death to direct descendants to make sure that the residence no rate band is used on the first death if the surviving spouse is likely to lose some or all of the residents no rate band because the inclusion of that interest in the property would push them over the 2 million threshold. Also potentially using a will trust on the first day so the assets pass into the will trust under which the surviving spouse could be a beneficiary for example, so a discretionary no rate band trust, so that then the assets don't pass by survivorship to the surviving spouse and exacerbate again the value of the estate, meaning that the residence no rate band would be tapered.

(55:58) Just to finish off, I've just got three more slides to quickly cover off. A question that I'm getting asked about more is about alternatives to trusts. So I'm getting asked a lot about family investment companies. So just thought I'd cover very, very briefly what a family investment company is. Basically, it's a company set up for the benefit of members of the same family and it's set up to hold the non-trading family wealth, so rental properties, investments, etc. And in the UK, it can be a limited company or it could be an unlimited company. Limited company obviously comes with increased disclosure requirements at companies house. Unlimited company comes with lesser disclosure at Companies House, but obviously with that uncapped personal liability for the shareholders. So we are doing succession planning without a trust and it's a way of doing succession planning in a controlled manner without a trust. And the good thing is that potentially exempt transfer treatment applies rather than unchargeable lifetime transfer treatment.

(57:02) Requires carefully drafted articles of association and different share classes being set up to safeguard control. And usually they're set up because corporation tax rates are better than income tax rates. So for example, UK dividends within a company aren't subject to corporation tax, whereas within an individual's hands, obviously, they'll be subject to income tax at the highest marginal rates of tax.

(57:29) I've got on the next slide, I've got a pictorial representation of what a family investment company is. They're often used for clients that have maybe more than 3 million or two and a half to 3 million that they want to do inheritance tax planning with and where they're used to actually running their own business and they've maybe, for example, got sales proceeds now from the sale of their own business.

(57:50) So parent would set up the company and would subscribe for the initial shares. Commonly, they'd fund the company by a loan and any subsequent gifts of economic shares to the next generation will be pets. So the parents can actually be the company director. They can control when dividends are declared. And they can obviously decide when is the most appropriate point to pass shares down to the next generation as well. And by funding the company by loan, they can continue to receive loan repayments back from the company by way of an income to supplement their pension income. So it's just an alternative to Trust. And just to finish up, we are seeing a huge uptake in the creation of trusts using onshore and offshore bonds. And the general rule of thumb is the greater the access that the person creating the trust requires, the less IHT efficient the trust actually is. So at the one end you see gift trusts where the settlor actually has no access, but obviously after seven years, the value of the gift, the value of the gift to create the gift trust is outside of the estate. But then at the other end of the spectrum, you've got a gift and loan trust where settler creates the trust with a loan and they retain access to the loan and growth is outside of the estate from day one. They retain access to the loan and the loan within the estate reduces year on year as they take back loan repayments and spend them. So it's a bit like an IHT capping exercise.

(59:23) So I'll hand back to David now just to finish off the session.

(59:37) Thanks, Martin and Elaine, and thank you all for joining us today. We hope you found the session useful and that it's given you some practical insights to support your conversations with clients ahead of April 2027. As a reminder, the webinar recording will be made available in the coming days. If you've submitted a question, and we haven't quite managed to sort of answer these during the session. We'll follow up with you afterwards separately. And finally, if you haven't already done so, please remember to download your CPD certificate that's been posted in the chat just before you leave the session. So yeah, thanks again for your time and continued support. We look forward to seeing you at a future event. Have a great day, all.

(1:00:17) Thanks for your time.

(1:00:19) Thank you.