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HMRC to relax definition of Dependant
by Ian Neale 07/07/2008
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The FA 2004 pensions tax regime in many respects is more liberal than the discretionary regime based on ICTA 1988 which preceded it. There are exceptions, and prominent among these is the definition of a dependant in Sch 28 para 15. A lot of anguish was generated in 2004 when - unmoved by protests from the industry - the Government insisted upon removing the right to provide a dependant's pension for an adult child from a registered pension scheme.
Under the pre-A Day rules (IR 12 (2001) Appendix 1), "dependant" meant any person who was financially dependent (or dependent because of disability) on the member. Under the original FA 2004 definition, a child who has reached the age of 23 and is not dependent by reason of physical or mental impairment could not qualify for a dependant's pension. From 6 April 2006 this definition was slightly extended by SI 2006/572 article 34 to allow a child over the age of 23 but still in full-time education or undertaking vocational training to qualify, in most circumstances. However, an adult child who, for example, has given up work to care for an aged parent cannot receive a dependant's pension (unless as an unauthorised payment). This was not the case before A-Day.
Belatedly, common decency has now prevailed. HMRC has published a draft SI (The Taxation of Pension Schemes (Transitional Provisions) (Amendment) Order 2008, which amends SI 2006/572 by inserting a new article 34A). From a date to be announced, this will further modify Sch 28 para 15 in relation to financially dependent children who are over 23 and have ceased full-time education or vocational training, to exempt pensions paid on the death of the parent who was the member of the pension scheme. It effectively extends the exemption from taxation as an unauthorised payment provided by Art. 34. Cases of mutual financial dependence also qualify.
Although backdated to A Day, as drafted the amendments will apply only where the member's pension or the pension death benefit has already come into payment (or entitlement to the pension death benefit has arisen), on the "announcement date" (which HMRC could deem to be 1 July 2008, the date the draft regs were published). Furthermore, pre-A Day the scheme rules must have allowed a pension to be paid in these circumstances, and must not have been materially altered since A Day in the respect.
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