Where an individual fails to exercise a right which increases the value of another person’s estate, an inheritance tax charge can arise on their death as if the failure had been a disposition by them. This could include, for example, a pension fund in drawdown where there are undrawn funds at death that would normally pass to the beneficiaries of the deceased free of inheritance tax. HMRC could argue that the undrawn pension represents a failure to exercise the right to take pension benefits so that an inheritance tax charge arises.
Finance Bill 2016 will include legislation to ensure that no inheritance tax charge will arise on pension funds designated for drawdown but not fully drawn down by death. The change will be backdated to deaths on or after 6 April 2011.
Drawdown was specifically introduced to provide flexibility when taking pension benefits. This change will provide much needed certainty over inheritance tax charges where this flexibility is used for the purpose envisaged by legislation but where funds remain at death.