The estates of lifelong savers who delay drawing benefits from their pension funds may be subject to additional inheritance tax following their deaths after a controversial victory for HM Revenue & Customs (HMRC).

The case which  involved a Mrs. Arnold who was diagnosed with a terminal illness and who failed to take retirement benefits (tax-free cash and an annuity) before her death overturns almost 20 years of established practice and increases the reach of inheritance tax (IHT), whilst creating a new risk that executors of estates could be fined for failing to pay the correct amount of IHT.

In the case of Mrs Arnold, who died in 2003,  HMRC argued that a transfer of value was made on the date of her death, because she had previously deferred her retirement benefits thus reducing the value of her estate.

Mrs Arnold’s legal team, however, claimed that not requesting pension benefits was not deliberate and that the monetary benefits should be passed on to her children without IHT deductions.

Those presiding over the newly formed First-Tier Tax Tribunal found in favour of HMRC, ruling that Mrs Arnold’s failure to claim pension benefits, whilst not intentional, gave rise to an IHT liability on the funds left in the pension.

David Maxwell, head of the Private Client Department at Seddons says that “we now have a situation where HMRC seem to be saying that where an individual defers some of their pension payments this will be regarded as IHT avoidance, and this is one more reason to seek professional advice when administering an estate”.