Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN17 Pension Tax: technical improvements

Who is likely to be affected?

1   Members, beneficiaries and administrators of registered pension schemes, their ex-employers and sponsoring employers.

General description of the measure

2   Legislation will be introduced in Finance Bill 2007 to the pension tax rules. Minor benefits provided by former employers for retired former employees will be excluded from taxation. The inheritance tax (IHT) pension rules will be amended to allow the exemption from IHT charges to operate within the same time frame as permitted by the rules of a registered pension scheme for payment of lump sum benefits following the death of a scheme member. Two anti-avoidance rules will be introduced. The first will ensure that the payment of unauthorised member and employer payments cannot be structured to reduce the overall tax charge on the scheme and the member or employer. The second will ensure that flexibilities which are being introduced in Finance Bill 2007 on scheme pensions paid early on ill-health grounds do not prevent the existing anti-avoidance arrangements from applying.

Operative date

3   The change to the pension tax rules will have effect on and after 6 April 2006. The IHT change will have effect for lump sum death benefits paid from registered pension schemes or section 615(3) scheme on or after 6 April 2006.

Current law and proposed revisions

Non-cash benefits

4   Former employers may make provision for retired former employees which takes a form other than cash and these non-cash benefits may be provided together with a pension or entirely separately.

5   Prior to 6 April 2006 these benefits were not taxable if only non-cash benefits were provided but were taxable if provided together with taxable cash benefits. This anomaly was rectified from 6 April 2006 by the new pensions legislation which ensured that most non-cash benefits received by former employees were taxable. This brought more closely into line the taxation on non-cash benefits received by pensioners with those received by employees. A de minimis limit was also introduced for benefits which did not exceed 100 in the relevant tax year.

6   The Government announcement on 6 December 2006 included an announcement that HMRC would discuss with interested parties concerns raised over the tax charge and administrative burden involved in the non-cash benefits that former employers provide to pensioners.

7   To ensure that the exemptions from tax work as intended, the group of "excluded benefits" on which there is no tax charge will be expanded to include a number of exemptions similar to those received by employees.

8   Broadly, the additional exclusions will relate to continued provision of accommodation and related removal expenses, welfare counselling, recreational benefits, annual parties and similar functions, equipment for disabled former employees, which, with necessary differences to reflect the situation of retired people, mirror exemptions conferred on employees. Exclusions will also relate to the writing of wills and benefits which were first provided before 6 April 1998.

9   Once the regulations take effect, the exclusions will be backdated to apply with effect from 6 April 2006. These additional exclusions will be set out in regulations.

Unauthorised payments

10 Section 160 of Finance Act 2006 introduces the payments which a registered pension scheme is authorised to make to members and sponsoring employers. All other payments are either unauthorised member or employer payments.

11 The changes will introduce changes to section 160 which define the amount of the unauthorised payment and prevent reductions in tax charges through manipulation of the way payments are made.


12 PBRN 14 announced the proposed changes to the payment of ill-health pensions. The existing anti-avoidance legislation at Schedule 28 paragraph 2A(4) will be amended to include reductions of ill-health pensions that are permitted under the revised paragraph 2(4)(a) where that reduction is part of "avoidance arrangements".

IHT rules

13 Where a member of a pension scheme assigns the benefits payable in the event of their death to scheme trustees and the benefits are then payable at the trustees discretion then the pension scheme is a discretionary trust for IHT purposes. Without the specific provisions in section 58(1)(d) of the Inheritance Act 1984 (IHTA) the IHT trust charges on "relevant property" in sections 64 to 69 would have effect during the member's lifetime.

14 Under the pre-6 April 2006 pension tax rules schemes were allowed a period of up to two years from the date of the member's death in which to pay out the death benefits. HMRC's IHT practice recognised this rule so provided the benefits were paid out within the same timeframe no IHT charges were taken on the trust property. The pension tax rules for registered pension schemes will be amended so that the time allowed for payment will run from the date on which the scheme is notified or if earlier, the date the scheme could have reasonably been aware of the member's death.

15 This timing will be mirrored for IHT in Finance Bill legislation so that provided lump sums are paid within the time allowed by the pension scheme rules on or after 6 April 2006 the scheme funds will not attract charges under sections 64 to 69 of IHTA. Failure to meet the deadline will have the effect, as before, that the protection from the IHT charges will have ceased at the date of death of the scheme member. Similarly, the same IHT treatment will apply to section 615(3) schemes which pay lump sums death benefits within the same time frame as registered pension schemes.

Further advice

16 If you have any questions about these changes, please contact the Pensions Helpline on 0115 974 1600. These changes are covered in the regulatory impact assessment entitled "Tax Relief for Pensions". Information about Budget measures is available on the HM Revenue & Customs website at