The Supreme Court has ruled that a pension transfer made in ill health was not liable for inheritance tax, six years after the case first went to court.
In its final judgment in the Commissioners for HM Revenue and Customs v Parry and Ors case, the court ruled that the UK taxman was not right to charge IHT on the claimant’s pension transfer, which was made within two years of death.
But the court said it was right to charge it on what HMRC deemed an “omission of benefits”.
Under current rules anyone with limited life expectancy who transfers their pension and then dies within two years could see their remaining defined contribution (DC) pot hit with a 40% tax charge.
However, transfers are granted an exemption provided the transfer was not meant to provide a ‘gratuitous benefit’ to potential beneficiaries.
The court decision on the ‘Staveley Case’ will make it harder for HMRC to argue a transfer led to a “gratuitous” benefit.
Certainty
Tom Selby, senior analyst at AJ Bell, said: “After years of wrangling in the courts this ruling finally brings some certainty to people who transfer their pensions while in ill-health.
“If the Court of Appeal ruling from 2018 had been upheld then DC pension transfers would have been at greater risk of being hit with a tax charge where the member died within two years of the transfer where the primary motivation was to change provider or reduce annual charges.
“This protracted case has exposed the complexity and confusion that exists around pensions and IHT. Research has exposed a gaping lack of understanding when it comes to gifting and IHT, and this is even more pronounced when pensions are thrown into the mix.
“It is within the gift of politicians to address this confusion and the common sense solution to this complexity would be to remove pensions from IHT altogether.”
Case
The Staveley case was first heard in 2014.
After a difficult divorce, Ms Staveley transferred part of a pension she had set up with her husband into a new pot and gave it to her children. She died just weeks later.
Because she was terminally ill, HMRC treated the transfer as a “transfer of value” followed by an “omission to act” as she did not draw any benefits, and applied IHT.
It argued the two actions were linked and designed to reduce the value of her estate for IHT purposes. The case has been through the Upper Tribunal and Court of Appeal before being referred to 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 the transfer did not.
The Supreme Court said: “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 Staveley intended to confer a gratuitous benefit her sons.”
Reassuring for industry
Jessica List, pension technical manager at Curtis Banks, said: “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.
“It’s hugely reassuring for the industry that the transfer itself has been found not to create an IHT liability, for reasons which would seem to set a precedent for other similar cases.”
Clare Moffat, head of intermediary development and technical at Royal London, said: “The Supreme Court decision in the Staveley case has clarified that intention is crucial when a pension transfer or switch is made in terminal ill health.
“Where there is an intention to give benefits which didn’t exist before, such as defined benefit to DC transfer, it will be subject to IHT.
“But a discretionary DC to DC switch may be completed without worry of IHT if it is for genuine commercial reasons and the beneficiaries on the expression of wish form stay the same.
“As always, financial advice is key.”
