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Court ruling on pension transfer IHT

20 August 2020

The Supreme Court has ruled that a pension transfer made in ill health should not be subject to inheritance tax in a landmark case which will set a precedent for transfers going forward. 

The case centred around a pension transfer by a woman named Mrs Staveley and the extent to which ‘gratuitous benefit’ rules set out in the 1984 Inheritance Tax Act mean that pensions transferred in ill-health are subject to IHT.

HM Revenue & Customs had argued that Mrs Staveley’s decision to transfer her pension following her divorce and bequeath money to her children, rather than leave it in the existing scheme and allow her ex-husband to benefit, conferred a gratuitous benefit on them. She died a few weeks later.

HMRC determined that inheritance tax was due on the death benefit on the basis that both the transfer of funds from the pension scheme into a personal pension scheme and Mrs Staveley’s omission to draw any benefits from the plan before her death were lifetime transfers of value.

The issue had divided the courts, having been previously heard by three different judges in the lower courts. However, in its final judgement of the case, the Supreme Court overturned the most recent 2018 Court of Appeal verdict and ruled that while the omission gave rise to an inheritance tax charge, the transfer should not be subject to IHT.

Industry experts said this latest ruling will set a precedent for similar cases.

Jessica List, pension technical manager, 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.”

Tom Selby, senior analyst, AJ Bell, commented: “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.”

Clare Moffat, head of intermediary development and technical, Royal London, added that the Supreme Court decision has clarified that “intention is crucial” when a pension transfer or switch is made in ill-health.

Moffat added: “Where there is an intention to give benefits which didn’t exist before, such as a DB 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.”

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