Inheritance tax & ill-health pensions

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Yesterday, 19th August, the Supreme Court handed down a judgement on case known to pension professionals as “Staveley” (HM Revenue & Customs v Parry & Orrs).

It has been established practice, and HMRC’s Inheritance Tax Manual is explicit that details of any pension transfers within two years prior to death should be reported on IHT409 with a potential charge to Inheritance Tax on the pension fund being levied. Simply put; current rules expose anyone who is in ill-health and transfers their pension and then dies within two years to have their remaining pot hit with a 40 per cent tax charge.

This long running case focused on the actions of the late Mrs Staveley and the Pension Sharing Order she received as part of her divorce settlement. As is unfortunately too common, the Staveley’s divorce proceedings were particularly acrimonious and on receipt of the Pension Sharing Order, terminally ill Mrs Staveley wanted to ensure that the valuable pension benefits couldn’t revert to her former husband, so her pension credit was transferred into a new pension pot in her name (as required by the Pension Sharing Order) and she bequeathed it to her children. Sadly, she died a few weeks later.

HMRC argued that the implementation of the Pension Sharing Order was a ‘transfer of value’ and by not drawing any benefits Mrs Staveley had created an ‘omission to act’ and therefore levied an Inheritance Tax charge against the value of the transferred pension.

HMRC argued that the two actions were linked and designed to reduce the value of her estate for IHT purposes. But the Mrs Staveley’s estate argued the transfer was exempt because it was not meant to confer a “gratuitous benefit”.

This case has been within HM Courts & Tribunals Service since 2014 and has divided legal opinion from the first hearing in First Tier Tribunal (ruled against HMRC), through the High Court (ruled in favour of HMRC) until the verdict was handed down by the Supreme Court.

By a majority, the Supreme Court partially allowed the appeal, holding that the omission gave rise to a charge to inheritance tax, but that the pension transfer did not constitute a ‘chargeable lifetime transfer’.

In the narrative the Supreme Court make it clear that “Staveley’s sole intention in transferring the funds was to eliminate any risk that any part of the funds might be returned to her ex-husband. The mere fact that the sons’ inheritance was intended to be enjoyed in a different legal form after the transfer did not mean that [Ms] Staveley intended to confer a gratuitous benefit her sons.”

Some commentators suggest this ruling, a legal precedent, clarifies confusion, but we’re not entirely convinced. The judgments have changed at every stage, and even in this final ruling the judges were not in complete agreement, showing what a highly contentious issue this has been. Given the complexity of the subject we wonder if the coming years will see HMRC arguing points of differential from the Staveley case in order to recover tax receipts.

However, we concur with many of our peers that the risk of a tax charge when a person dies within two years of transferring a defined contribution pension AND where the primary motivation for that transfer was to change provider or lower charges is considerably lower than it was at the beginning of this week. Equally where it is judged that the motivation is an intention to give benefits which didn’t exist before (for example a defined benefit transfer to defined contribution arrangement), or the amendment of beneficiaries of any arrangement, then we expect HMRC to continue to seek to add the pension fund back into the estate value for Inheritance Tax.

Don’t hesitate to contact us if you have any queries. Remember, we’re here to help you.



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