Treatment of SIPP in estate, and IHT or other tax

dunroving

dunroving said:

First reply (from Fidelity):

"Thank you for your secure message of 23 November 2022, regarding your beneficiary query.

Please know, if you do not not allocate beneficiaries on your accounts, then it will be the responsibility of the executors on the probate to decide who is the benefit from the ISA. For your SIPP account, it's our board of trustees who decide on who will benefit from it. When a client passed away, holdings will remain in the market until probate has been sent in with the sell or transfer instructions.

With regard to US citizenship, please know, if the individual wishes to make a withdrawal having inherited the account, they can only do so to a UK bank account with an ISA. For the SIPP account however, the US bank is acceptable.

It is important to note, that the SIPP falls outside of your estate, and it will be up to our trustees to identify who is to benefit from said account.

For further information on the process, please see our helpful webpage. I have included a link below which you can copy and paste to your internet browser for access:

https://www.fidelity.co.uk/what-to-do-when-someone-dies/"

So, my understanding from this message is as follows ...

ISA: in one sense this seems quite straightforward (because the executors decide who gets the money - and would presumably just follow the instructions regarding beneficiaries in my will - but see note below regarding the US beneficiary), .

SIPP: Probably a good idea to complete a beneficiary form, using the same proportions as I have designated in the will. That at least avoids any unnecessary additional work on the part of the executors.

US beneficiary: Not sure I understand the comment in the ISA, regarding the US beneficiary having to receive it in a UK account. A US resident cannot generally open a UK bank account. Perhaps their comment assumes the beneficiary wishes to keep the ISA status? (they won't want to, in fact are not allowed to). I had assumed the ISA contents would simply be cashed and added to the assets in the estate(?) Re: the SIPP, I'm quite surprised they would be happy sending to a US bank, as a UK pension does not qualify as a pension in the US. Argh, so I'm still pretty confused about this.

FYI, below is the text of the message I sent them:

"Regarding my Fidelity ISA and SIPP, I wish to divide them proportionally between 7 persons when I die. I have two questions:

Question 1: If I do not designate beneficiaries and proportions in my account, would the trustees likely follow the instructions in my will? Or would my holdings simply be liquidated and sent to the executors to add to the remainder of my estate?

Question 2: One of my beneficiaries is a US citizen and resident in the US. Would that pose any specific problems if I leave a proportion of my ISA and SIPP to them?

Thank you for any advice on these two matters."

dunroving

Argh. Response from Vanguard below. They seem to have misunderstood my question and think I want to know general information about wills, executors, probate, etc.

"With an ISA you are not able to leave beneficiaries like you do with a Pension.

If you do pass away, it would be the responsibility of your family or a solicitor to notify us of your passing.

We would also need some documentation to be sent in to establish who we are to deal with - this would be the Death Certificate, Will and Grant of Probate or letters of administration.

This would then allow us to accept the instruction as to what to do with your account and we would follow this accordingly.

If you do not have a Will, an executor would be appointed to your estate, this is usually decided by legal authorities.

Once the executor is established and the Grant of Probate has been provided we would then pay out the proceeds of your Vanguard ISA as per the executor instruction."

At least I learned one thing: You can't leave a list of beneficiaries in connection with an ISA, only a SIPP. 

I have reframed my questions to them in the hope of getting better information. My reframed questions are below:

"Thank you for your reply. Perhaps I did not explain my question clearly. I am fully aware of issues of wills (I have one), executors (I have 2), estate and probate process. Maybe I can reframe my question as follows:

Question 1 (my ISA) - after the process below has been completed, will Vanguard simply send the proceeds of my ISA to my executors, to be added to the remainder of my estate and distributed according to my will? Or would Vanguard distribute the proceeds of my ISA directly to the listed beneficiaries, in the proportions stated in my will?

Question 2 (SIPP) - If I have not completed a list of beneficiaries form with Vanguard, what would happen after my executors contact Vanguard?

Question 3 (US citizen/US resident beneficiary) - does Vanguard have any policies regarding overseas citizens/residents receiving a proportion of the proceeds from my IS and SIPP when I decease? Thank you for your help with these matters.

Regards, etc., etc."

dunroving

Update - here is the Vanguard reply to my second message.

"Thank you for your reply, I hope you are well.

I hope to have answered your queries below:

1. Upon death we would be provided with a death certificate from the executors. We will then be able to generate a valuation for the account at the date of death, which they can then use to obtain Grant of Probate. The executors would then provide us with the Grant of Probate, a letter of instruction and any verification details of the executors' that we may require. Once reviewed, we would then be able to pay out in accordance with the letter of instruction.

2. It important to nominate beneficiaries in order to ensure that the pension pot is effectively transferred across, if there are no beneficiaries the pension fund might be transferred back to your estate and be subject to 40% inheritance tax.

3. Yes you can nominate beneficiaries who are a citizen of/reside in the US, the difference would be that they would be unable to hold a Vanguard account with us so the drawdown SIPP option would be lost."

So, in addition to what I took from Fidelity's message, I gather from Vanguard's reply that an important consequence of not completing a beneficiary form for the SIPP is that the SIPP could simply be liquidated, transferred to the estate, and then be subject to IHT. With a beneficiary form, Vanguard would transfer the relevant proportions of the SIPP to SIPP accounts held by each beneficiary.

It also looks like that is what might happen anyway, re: the US individual who is a beneficiary (Vanguard would liquidate that proportion of the SIPP before transferring, and the IHT-exempt benefits of the SIPP would be lost for that proportion.)

Think I need to (a) fill in beneficiary forms for Fidelity and Vanguard ASAP, and (b) re-think how I have my will set up, with regards to the US beneficiary.

I've considered hiring a professional to advise me on this, but the lawyers say the tax implications aren't their area of expertise, and the accountants say the legal aspect of wills and estates aren't their area of expertise ...

Marcon

dunroving said:

Update - here is the Vanguard reply to my second message.

"Thank you for your reply, I hope you are well.

I hope to have answered your queries below:

1. Upon death we would be provided with a death certificate from the executors. We will then be able to generate a valuation for the account at the date of death, which they can then use to obtain Grant of Probate. The executors would then provide us with the Grant of Probate, a letter of instruction and any verification details of the executors' that we may require. Once reviewed, we would then be able to pay out in accordance with the letter of instruction.

2. It important to nominate beneficiaries in order to ensure that the pension pot is effectively transferred across, if there are no beneficiaries the pension fund might be transferred back to your estate and be subject to 40% inheritance tax.

3. Yes you can nominate beneficiaries who are a citizen of/reside in the US, the difference would be that they would be unable to hold a Vanguard account with us so the drawdown SIPP option would be lost."

So, in addition to what I took from Fidelity's message, I gather from Vanguard's reply that an important consequence of not completing a beneficiary form for the SIPP is that the SIPP could simply be liquidated, transferred to the estate, and then be subject to IHT. With a beneficiary form, Vanguard would transfer the relevant proportions of the SIPP to SIPP accounts held by each beneficiary.

It also looks like that is what might happen anyway, re: the US individual who is a beneficiary (Vanguard would liquidate that proportion of the SIPP before transferring, and the IHT-exempt benefits of the SIPP would be lost for that proportion.)

Think I need to (a) fill in beneficiary forms for Fidelity and Vanguard ASAP, and (b) re-think how I have my will set up, with regards to the US beneficiary.

I'd go back to Vanguard and ask why if the pension fund 'might' be transferred to the estate (i.e. it isn't certain that it would be) it would be subject to IHT, since it sounds as if the payment would still be at their discretion (otherwise surely they would have said that the fund 'would' be transferred?).

dunroving said:

I've considered hiring a professional to advise me on this, but the lawyers say the tax implications aren't their area of expertise, and the accountants say the legal aspect of wills and estates aren't their area of expertise ...

Have you tried https://www.step.org/about-step/public

dunroving

Marcon said:

dunroving said:

Update - here is the Vanguard reply to my second message.

"Thank you for your reply, I hope you are well.

I hope to have answered your queries below:

1. Upon death we would be provided with a death certificate from the executors. We will then be able to generate a valuation for the account at the date of death, which they can then use to obtain Grant of Probate. The executors would then provide us with the Grant of Probate, a letter of instruction and any verification details of the executors' that we may require. Once reviewed, we would then be able to pay out in accordance with the letter of instruction.

2. It important to nominate beneficiaries in order to ensure that the pension pot is effectively transferred across, if there are no beneficiaries the pension fund might be transferred back to your estate and be subject to 40% inheritance tax.

3. Yes you can nominate beneficiaries who are a citizen of/reside in the US, the difference would be that they would be unable to hold a Vanguard account with us so the drawdown SIPP option would be lost."

So, in addition to what I took from Fidelity's message, I gather from Vanguard's reply that an important consequence of not completing a beneficiary form for the SIPP is that the SIPP could simply be liquidated, transferred to the estate, and then be subject to IHT. With a beneficiary form, Vanguard would transfer the relevant proportions of the SIPP to SIPP accounts held by each beneficiary.

It also looks like that is what might happen anyway, re: the US individual who is a beneficiary (Vanguard would liquidate that proportion of the SIPP before transferring, and the IHT-exempt benefits of the SIPP would be lost for that proportion.)

Think I need to (a) fill in beneficiary forms for Fidelity and Vanguard ASAP, and (b) re-think how I have my will set up, with regards to the US beneficiary.

I'd go back to Vanguard and ask why if the pension fund 'might' be transferred to the estate (i.e. it isn't certain that it would be) it would be subject to IHT, since it sounds as if the payment would still be at their discretion (otherwise surely they would have said that the fund 'would' be transferred?).

dunroving said:

I've considered hiring a professional to advise me on this, but the lawyers say the tax implications aren't their area of expertise, and the accountants say the legal aspect of wills and estates aren't their area of expertise ...

Have you tried https://www.step.org/about-step/public

Thanks, Marcon - I'll follow up on that link.

Re: The first point, I'll chase that up, but it does strike me that if a pension is "cashed in", tax is usually due. For example, if Beneficiary 1 has their SIPP portion transferred to a SIPP of their own, they would normally pay income tax on 75% of a withdrawal, unless they are below the personal allowance threshold, of course. So, it does seem counterintuitive that if the SIPP were cashed and added to the value of the estate, no tax of any sort would be paid. 

Ideally, I'll be able to get enough information to add to my "information to executors" spreadsheet ;-) to ensure that beneficiaries will simply have the SIPP transferred to a SIPP of their own, so the above issue will be a non-issue.

Marcon

dunroving said:

Marcon said:

dunroving said:

Update - here is the Vanguard reply to my second message.

"Thank you for your reply, I hope you are well.

I hope to have answered your queries below:

1. Upon death we would be provided with a death certificate from the executors. We will then be able to generate a valuation for the account at the date of death, which they can then use to obtain Grant of Probate. The executors would then provide us with the Grant of Probate, a letter of instruction and any verification details of the executors' that we may require. Once reviewed, we would then be able to pay out in accordance with the letter of instruction.

2. It important to nominate beneficiaries in order to ensure that the pension pot is effectively transferred across, if there are no beneficiaries the pension fund might be transferred back to your estate and be subject to 40% inheritance tax.

3. Yes you can nominate beneficiaries who are a citizen of/reside in the US, the difference would be that they would be unable to hold a Vanguard account with us so the drawdown SIPP option would be lost."

So, in addition to what I took from Fidelity's message, I gather from Vanguard's reply that an important consequence of not completing a beneficiary form for the SIPP is that the SIPP could simply be liquidated, transferred to the estate, and then be subject to IHT. With a beneficiary form, Vanguard would transfer the relevant proportions of the SIPP to SIPP accounts held by each beneficiary.

It also looks like that is what might happen anyway, re: the US individual who is a beneficiary (Vanguard would liquidate that proportion of the SIPP before transferring, and the IHT-exempt benefits of the SIPP would be lost for that proportion.)

Think I need to (a) fill in beneficiary forms for Fidelity and Vanguard ASAP, and (b) re-think how I have my will set up, with regards to the US beneficiary.

I'd go back to Vanguard and ask why if the pension fund 'might' be transferred to the estate (i.e. it isn't certain that it would be) it would be subject to IHT, since it sounds as if the payment would still be at their discretion (otherwise surely they would have said that the fund 'would' be transferred?).

dunroving said:

I've considered hiring a professional to advise me on this, but the lawyers say the tax implications aren't their area of expertise, and the accountants say the legal aspect of wills and estates aren't their area of expertise ...

Have you tried https://www.step.org/about-step/public

Thanks, Marcon - I'll follow up on that link.

Re: The first point, I'll chase that up, but it does strike me that if a pension is "cashed in", tax is usually due. For example, if Beneficiary 1 has their SIPP portion transferred to a SIPP of their own, they would normally pay income tax on 75% of a withdrawal, unless they are below the personal allowance threshold, of course. So, it does seem counterintuitive that if the SIPP were cashed and added to the value of the estate, no tax of any sort would be paid. 

Not if you were under 75 at the time of your death. See https://www.hl.co.uk/help/sipp,-drawdown-and-annuity/sipp/retiring/what-happens-to-my-SIPP-when-i-die or https://www.jameshay.co.uk/information/popular-links/what-happens-to-my-sipp-when-i-die/ if you remain to be convinced!

dunroving

Marcon said:

Not if you were under 75 at the time of your death. See https://www.hl.co.uk/help/sipp,-drawdown-and-annuity/sipp/retiring/what-happens-to-my-SIPP-when-i-die or https://www.jameshay.co.uk/information/popular-links/what-happens-to-my-sipp-when-i-die/ if you remain to be convinced!

Ah, OK, I have much to learn, Obi-Wan! ;-)

After almost being killed in a car crash a while back, it became my priority to make sure I had made a will, as I know what a mess dying intestate can cause.

I'm now at the point of figuring out the implications of said will, and learning as I go. I'm putting together a spreadsheet of information to give my executors, so they don't have to start from scratch, so to speak. If the above is correct (and I have no reason to doubt you), that seems like a pretty good deal! Also is a reason to perhaps draw living expenses from other sources first and leave the SIPPs intact (I'm currently over IHT threshold).

I'll do more research - thanks again for the heads-up!