Bypass Trusts: Reassessing their role in a changing legislative landscape - Q&A
Last Updated: 16 Oct 25 15 min read
Bypass Trust Matters
Should we track the transfers in to a pension - I heard that each pension transfer in has its own nil band in a bypass trust, but it may be hard to track....
Each pension is a settlement in its own right so in theory you need to be able to track the amount of NRB each pension has, the separate 10 year anniversary dates and the value for each pension.
In practice, we suspect a just and reasonable basis to tax the bypass trust may need to be agreed if this is not available.
If the Trust has no initial value, does it NEED to be registered?
Yes, there ill be initial value. Ours is £10. If the new TRS diminimus passes into law there may be no need to register.
Does the Bypass Trust have to be setup during the settlor's lifetime, or can it be created on death as part of the will?
It's just a trust outside of the pension so it can be either. But check that scheme rules allow payments to trusts and if they re specific about when they are established.
When, on death, the new bypass settlement is added some years later to the pilot trust, does that new settlement also then need to be registered with TRS?
No
With regard to the tax pool, will a bypass trust potentially fall foul of the rule where undistributed income becomes capital in nature after a period of time?
Income remains income in a discretionary trust it is only potentially turned into capital for periodic charge purposes. The pension death benefit rules have specific legislation for the tax credits so the same consideration of running a tax pool and distributing income do not apply.
What is the position with >LSDBA benefits into trust death pre 75 - I understand tax credits for beneficiaries do not apply unlike post 75 deaths
We are awaiting clarification form HMRC. We had been told that pre 75 over LSDBA was capital and would be taxed at 20% no reclaim. But also have been told by advisers that they have been charged 45% tax which suggests it is income so the general trust rules of tax credits with distributed income should in theory apply.
Can you still make loans from the trust to the sp'se so that when she dies her estate needs to pay the loan back thus reducing her est's potential iht liability
That is an option assuming there is nothing in the deed preventing it. We would recommend it has appropriate documentation and consider whether other beneficiaries would be happy, especially if there is no interest as this is devaluing the trust fund.
Can you take a loan from the bypass trust?
Yes, subject to trust terms.
can we as advisors be their professional trustee?.
That is up to you based on your, knowledge, experience, qualifications and insurance.
Is the tax credit for initial tax on payment into trust ongoing (to offset partial payouts)? & does the beneficiary benefit from this if they're a BR taxpayer?
Yes, the 45% tax credit accompanies the onward distribution of the death benefit as and when it happens. So a £55 distribution would be deemed £100 to the beneficiary and if they were a 20% tax payer they would be due a £25 refund.
So every co pension scheme potentially subject to periodic charge?!!
All pension benefits paid to bypass trusts will be subject to periodic charges.
Where the bypass trust is an existing discretionary trust that has previously paid a periodic charge, does the pro rate ten year charge still apply for pension?
The pension benefits and the existing benefits should be treated as two separate entities for IHT purposes.
Presumably the payment of a periodic charge is not considered a distribution for the next periodic charge date?
Agreed
Bit confused when discussing the periodic charge on the pension. Why is the bypass trust set up on the same day someone joined a pension scheme?
It isn't the bypass trust is set up when it is set up. The pension settlement is set up when the scheme is joined/placed into trust and when ultimately paid into the trust it keeps it's 10 year anniversary.
What if you have done pension consolidation and moved x amount of pensions into 1?
Each pension is a settlement in its own right so in theory you need to be able to track the amount of NRB each pension has, the separatee 10 year anniversary dates and the value for each pension.
In practice, we suspect a just and reasonable basis to tax the bypass trust may need to be agreed if this is not available.
do you round up/down to the nearest quarter when calclulating the avalable NRB for different settlements into the same trust
It is complete quarters that are used so round down.
How is value apportioned on death for a pension which was a consolidation over time i.e. various values over time
Each pension is a settlement in its own right so in theory you need to be able to track the amount of NRB each pension has, the separate 10 year anniversary dates and the value for each pension.
In practice, we suspect a just and reasonable basis to tax the bypass trust may need to be agreed if this is not available.
With the tax reclaim on a Bypass trust, how is this affected by the marginal rate of income tax paid by the beneficiaries ?
A £55 distribution would be deemed £100 to the beneficiary and if the tax is less than £45 then there should be a refund of the difference.
If using a bypass trust, death benefit enters relevant property regime on death. If Will creates a testamentary trust, would the settlements be related?
Our understanding is they are not related the pension settlement started when the pension started so would be separate.
Not sure if it's been asked - but HOW do we set one up?
By completing the trust deed, except the property will probably be a nominal cash sum as opposed to a bond.
when in the trust is it taxed for income and gains as they arise like a GIA or can it be in a Bond wrapper or other wrapper
The death benefits will be received in cash the ongoing tax treatment will be dictated by what it is invested in.
From April '27, are there reasons why the expression of wish shouldn't allocate over £325,000 to a non-spouse beneficiary? Any tax implications?
It would generate an IHT liability. Like everything it's down to clients needs and objectives, taking an IHT hit may be the only way to achieve the clients objectives.
Can properties (rental) be left into the bypass trust
Yes, providing the deed allows. It’s just a trust
Silly question, but what do you do with the £10?
We were once told to document a trustee meeting where the expenses were £10. Or just staple it to the trust and keep it there.
Can a Bypass Trust be used on an offshore Qnups Pension
Yes, assuming the rules allow payments to trusts.
Just going back to the will trust - is there any way to create an IPDI trust for the death benefits - no periodic charges etc?
We don’t think you can create an IPDI for the [pension death benefits as they stay in their own settlement. And the benefits would not be settled by will.
Pension Death Benefit Matters
EOW to trust - does this reduce the control/direction of death benefits e.g. blended families with a surviving spouse could overall the direction to a trust?
The scheme will still require to exercise discretion and make suitable investigations into how they should exercise their discretion. As the EofW is the last communication the scheme has had with the member then the expression caries a fair amount of weight and would normally be followed unless there were circumstances that come to light that would make following the nomination unreasonable. Potential beneficiaries can obviously challenge pension schemes in the exercise of there discretion, like they could with any trustee of any type of trust exercising their discretion.
Income Tax in full (post IHT charge April 2027) if deceased was 75+?
Yes, on the balance after any IHT charge.
is the lump sum death benefit charge an income tax? why is it offsettable against a beneficiary's income?
It is a charge to income tax and there is specific legislation allowing the beneficiary a tax credit.
If a client dies post age 75 - will there be an immediate 45% trust tax charge on entry into the trust, IHT and then tax on income?
The 45% tax charge is the income tax charge. If the benefits are paid before the Hit position is known then the 45% will apply to the full fund. If the IHT is known and being paid form the fund then there 45% will be on the net fund after IHT. We do not know whether the 45% can be recovered of the pension is subsequently found out to be subject to IHT.
Could you nominate 2 bypass trusts 50/50? So if parties don't get on they can take control of a 50% share?
In theory. But in practice would you not just ask for the death benefit to be split between the two "warring" parties?
If the surplus fund balance on death is left to charity does that count towards the 10% of the members estate threshold for the reduced rate to apply?
At present we believe the pension will fall into the general component of the estate for IHT so at least 10% of the total value of the general component wither pension assets non pensions assets or both would need to be left to charity
Just to clarify, nominating a pension to a trust would use NRB but a DIS would not use NRB on first death?
Yes, the bypass trust is not exempt but the DIS is intended to be exempt (subject to meeting the condition s to be a DIS0.)
Client 75 now, leaves DC Pot £500k to Bypass Trust assuming dies pre april 2027 what is the tax position. 45% Tax charge?
Yes, there would be a 45% charge but no IHT.
Do we yet know how post 75 pension death benefits to trust will be dealt with after April 2027?
The exact same as now except there may be IHT to pay. We do not know if trustees will be able to reclaim any of the 45% tax paid if the pension ends up causing IHT.
When does the special lump sum death benefit 45% charge apply?
After age 75 and before age 75 but the benefits are not paid within 2 years of the scheme administrators becoming aware of the members death.
Can you do up to the Nil Rate Band on a pension with a bypass Trust. I.e. pension £400k put £325k into Bypass and the other £75k go to the spouse?
Yes, we believe that is possible. You can pay more than one death benefit to more than one person.
would you explain how the nrb is apportioned between a pension fund & the overall estate?
We cover this in our August webinar. Broadly, the NRB is apportioned between the pension and rest of estate based on the chargeable amounts of the pension and non pension assets. A simple example if the non pension went to spouse and pension went to someone non exempt (like a bypass trust) the pension would receive the full NRB.
Just to clarify, after April 2027, will putting a pension into a Bypass Trust trigger any IHT initially?
Yes, the bypass trust is not exempt so would be chargeable. If the amount was over the available NRB for the pension.
When we will know more about the LSDBA excess 20% or 45% tax charge for death pre 75?
Pass.
Post 2027, Post 75 if there is a tax charge of 45% on the way into the bypass trust, if using the NRB is it the net amount that counts?
The 45% tax would be on the net of IHT payment. If the full payment is made then there will be 45% tax on the whole amount. We currently don’t; know if the trust can reclaim the 45% paid on the amount related to the IHT.
General Pension Matters
Is there any value in placing a section 32 pension contract into trust before the changes come into force in 2027?
We assume the s32 is currently payable to the estate. Value is a wide question, there may be value in that the provider will not require probate to pay out the death benefit. From a pure IHT point of view the placing of the s32 death benefit in trust will be a transfer of value for IHT purposes, which should be negligible if the policyholder is in good health. In April 2027 it will be in the estate and to could actually get complicated with a post April 27 death with a previous transfer of value pre April 2027.
What are requirements / rules for payment of special ill health payment? Can client Access whole pension as TFC if only 12 months to live? Letter from doctor ?
A serious ill health lump sum can be paid tax free subject to available LSDBA form uncrystallised funds. There needs to be evidence from a registered medical practitioner. We have a form we need the doctor has to complete - you would need to ask each provider what their admin arrangements are. Letters don't often work as they may explain someone condition but don't tell us the key point - someone has life expectancy less than 12 months
Is there an option to by pass a spouse and nominate adult children to receive the pension via a nomination form & EOW, instead of using a by pass trust?
Yes, you could if that's what you wanted to happen. But what if the spouse needed some income etc
You mentioned that a client could direct the pension death benefits to the discretionary trust set up through a will - how is this nominated on the EOW form?
Ask the scheme in question, for us you could just write a letter explaining that you had created a trust in your will and you wanted the death benefit paid to that.
Where would you source a bypass Trust for DISB? Would the scheme Trustee make them available or would the client need to see a Solicitor?
Many providers have sample deed at no cost. If you had specific non standard or bespoke needs you could get a solicitor to draft one.
Miscellaneous Matters
Will M&G investment bonds work with bypass trust wordings prepared elsewhere and some time ago by the deceased?
Probably, most trusts have wide investment powers - check the deed.
wouldn't taking pension income and funding whole of life be more efficient and still provide benefits of control but without the IHT / income tax?
Perhaps, it’s down to individual circumstances. But we ae talking about lump sum death benefits here so there may not have been the opportunity to get income or put income into payment, and the income may actually have been needed for retirement. Also, investing the income could outperform the sum assured. Watch August webinar.
if a client has already set up a trust with £10 (was actually with SJP) can this be transferred to another 'provider' or trust?
Trusts don’t transfer, when they are set up they remain - the underlying investments can move.
Where it may be sensible to utilise NRB on 1st death, is there any benefit of a Bypass Trust for pension benefits over a Will Trust for other assets
Good question. Would need analysis but at a high level given the taxation of pension on death can be quite harsh we suspect you’d favour using a NRB to get pension assets into a more benign regime.
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