So, stakeholder pensions are now with us. No doubt there will be many teething problems, even in the simple situation of someone wanting to effect a stakeholder pension scheme for their own benefit.
What of the well publicised situation of effecting a stakeholder pension scheme on behalf of someone else, specifically a minor?
We have heard of estimated pension funds at age 50 (the earliest age at which benefits can normally be drawn under a stakeholder pension scheme) with a large number of noughts on the end.
This all sounds very impressive – and it is – but what of the inheritance tax position as far as the initial transaction is concerned? It obviously involves a gift – how does it all work?
It is actually not as simple as it may first appear and, in fact, to clarify the position an enquiry has been made to the Capital Taxes Office. This is something that is obviously a hot potato because a reply was received very promptly.
Let us look at a grandparent who is prepared to provide the money for a contribution to a stakeholder pension scheme for his/her minor grandchild. First, only a legal guar- dian can set up a scheme for the benefit of a minor. Second, is the grandparent the legal guardian? Unlikely, it is more likely to be a parent. See below for the manner in which the contract may be effected in view of this.
The maximum amount that can be paid each year is the equivalent of £3,600 net of basic rate income tax relief, that is, £2,808.
Most personal pension (including stakeholder) schemes adopt the Integrated Model Rules and it is assu-med that is the case in this instance.
The CTO view of the transaction as far as the IHT situation is concerned is that the actual payments to the stakeholder pension scheme are transfers of value. These would be from the grandparent as the loss to the estate suffered would be from that individual.
The actual amount of the transfer of value if the maximum is gifted is £2,808 (see above – that is, the net of basic rate income tax relief amount).
The CTO has also confirmed that the transfer of value could be an exempt transfer utilising either of(or a combination of) the grandparent's annual £3,000 exemption or the normal expenditure out of income exemption.
If this was possible, and to what extent, would be dictated by factors such as whether the annual exemption, or part of it, had already been utilised elsewhere and, of course, whether all three of the criteria in section 21 of the Inheritance Tax Act 1984 (IHTA84) relating to the normal expenditure out of income exemption were satisfied.
What if the transfer of value could not be an exempt transfer? Would it be a potentially exempt transfer or a chargeable transfer?
The CTO's reply is repeated verbatim:
“I agree the transfer of value would be a potentially exempt transfer within s3A IHTA84. Where the death benefits are written on discretionary trusts there is a prima facie argument that at least part of the payment would represent a chargeable transfer rather than a potentially exempt transfer.
“However, assuming the minor is in normal health,etc, with a normal life expectancy, then I would take the view that 'part' would be nominal, that is, the whole payment would be a potentially exempt transfer.
“I agree the transfer of value could be made in either of the ways you mention.”
The two ways mentioned were:
The grandparent making the payment into a bank account held for the benefit of the minor – the legal guardian could then use the amount to make the payment into the stakeholder pension scheme, or The grandparent making the payment direct to the scheme administrator of the stakeholder pension scheme with the legal guardian's agreement.
The amounts may be small but it could be significant as to whether the transfer is potentially exempt or chargeable depending on other action that the donor may have previously taken.
It would appear that the CTO is looking at a practical solution.