The executor sat opposite me. His brother had died six months prior. His sister-in-law was meant to receive a £500,000 pension pot, tax-free. Now HMRC were looking at a £200,000 Inheritance Tax bill from that fund. The money was frozen. The family was breaking.
His brother, diagnosed with a terminal illness, had done what seemed sensible. He consolidated three old pensions into a new SIPP about 18 months before he died. He wanted to leave things tidy for his wife. The problem is timing. Because he was in known ill health and died within two years of the transfer, HMRC can challenge the move. They can classify it as a transfer of value made purely to improve his family's inheritance tax position.
The Structural Flaw
Pensions are normally held in trust. This keeps them outside your estate, meaning they can pass to your beneficiaries free of Inheritance Tax. It is one of the most effective parts of any estate plan. However, the two-year rule on transfers made in ill health acts as a clawback. It gives HMRC the authority to pull the entire transferred amount back into the estate for IHT calculation. At 40%, the consequences are severe. The executor is left in a protracted, stressful negotiation he never anticipated. The advice his brother received was incomplete.
Certainty in the Plan
The abolition of the Lifetime Allowance has brought pensions into sharper focus for estate planning. Yet the underlying IHT principles have not gone away. This is the critical point for UK families. Any significant financial action taken when health is failing will attract scrutiny. For a pension transfer, we must establish a clear commercial justification. We build a file of evidence showing the move was for lower fees, better fund choice, or more flexible income options. It is this file that gives an executor the tools they need. It demonstrates the primary motive was sound financial management, not tax avoidance.
These situations are hard. They place enormous pressure on grieving families. Good planning provides certainty when it is needed most. If this story raises questions for you, we should talk.
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Written by Sean Kiani, Estate Planner at Inheritance Made Simple. Sean writes and reviews the firm's guidance on estate planning, wills, trusts and inheritance tax, and works with families across Bournemouth, Poole, Dorset and Central London. Verify Sean's Society of Will Writers membership listing.