David Downie, technical manager at Standard Life, examines what the ‘Staveley case’ could mean for IHT and pension transfers.
The Supreme Court recently handed down its judgement in the long-running Commissioners for Her Majesty’s Revenue and Customs v Parry & Ors, commonly known as the ‘Staveley’ case. The proceedings examined whether inheritance tax (IHT) was payable to HMRC on a pension transfer made by an individual in ill-health.
While the court’s decision was based on the facts of the case in question, the judges’ reasoning could have a bearing on how HMRC treats pension transfers more generally in the future – specifically ones made by individuals in ill-health and within two years of their death.
How did the case come about, and what was decided?
The case focused on the circumstances of a Mrs Staveley, who, while seriously ill, transferred a Section 32 pension into a personal pension plan to ensure her ex-husband did not receive any benefit on her death.
Mrs Stavely died shortly after making the transfer, and her children received the death benefits from the personal pension. HMRC subsequently claimed that her transfer was subject to IHT on two counts – one through the transfer itself, and another as a result of omitting to take the benefits while she was still alive.
The Supreme Court rejected HMRC claim on the transfer on the basis that there was no gratuitous intent i.e. that the motive was not to benefit her sons by her actions.
However, they upheld HMRC’s claim on the grounds that she omitted to take benefits. These ‘omission to act’ rules ceased to apply to pension benefits from April 2011, so they do not apply today, but remain applicable to this case as the transfer took place in 2006.
But the outcome could still have implications for those advising on IHT and pension transfers in the future.
Why is this important?
The significance of the Supreme Court’s ruling centres on how it might challenge HMRC’s current practice in assessing transfer cases – specifically HMRC’s ‘return to zero’ approach.
HMRC’s published view on pension transfers is that there is a brief moment during the transfer where the rights under the first scheme come to an end and momentarily return to the estate, only to then be gifted as the scheme member makes a fresh gift of the rights under the new scheme.
In the context of the Staveley case, the court described this approach as ‘wholly artificial’.
The court’s view was that, in the transfer process, the disposition, or gift, is the transfer of funds from one pension scheme to another and there is no hypothetical moment where the rights return to the estate and are subsequently given away when the new scheme is selected.
Importantly, this view highlights that a scheme-by-scheme comparison will likely matter when considering whether or not the transfer is ultimately subject to IHT.
If HMRC intends to follow the judges’ views and change its ‘return to zero’ approach, there may now be wider issues to factor into the process of considering a transfer made in ill-health:
1. Has there been a disposition, i.e. what has been gifted?
2. What is the transfer of value for IHT on the disposition, i.e., what is the loss to the estate?
3. And if there is a transfer of value, was there any gratuitous intent – i.e. was it done with the intention to benefit someone else?
What does this mean in practice?
The effect of this potential shift can be illustrated through some examples:
Scenario 1 – transfers from S32/RACs to DC pension (the ‘Staveley’ case circumstances)
In the Staveley case, it was determined that the disposition was the funds held in the S32 to the personal pension.
Death benefits under S32 buy-out plans and Retirement Annuity Contracts (RACs) form part of the estate unless placed in their own trust. Transferring to a DC scheme means that death benefits are now paid at the discretion of the scheme administrator, and outside of the estate for IHT.
Here, there is a loss to the estate. Only if it can be shown (as it was in court) that there was no intent to confer a ‘gratuitous benefit’ will the transfer be free of IHT.
Scenario 2 – transfers from DC to a DC pension
In these circumstances there is a disposition – the transfer of funds from one pension scheme to another.
However, unlike in circumstances such as those the Staveley case, DC schemes normally have discretion over the appointment of death benefits. Death benefits therefore remain outside of the estate both before and after the transfer.
Crucially, if it’s no longer the view that these return to the estate during the transfer process, it could be argued that there may be no loss to the estate, and so the transfer has no value for IHT.
Scenario 3 – transfers from a DB scheme to a DC pension
With a DB scheme, the member has a right to the pension at retirement but not their own identifiable pot of money. On death it is typically free of IHT and provides a survivor’s pension.
When a member transfers their DB pension to a DC scheme, the transferring scheme calculates a cash equivalent transfer value (CETV). If these are no longer treated as re-joining the estate during transfer in future, there may be no loss to the estate in respect to the CETV as it was never payable to the member, or to their estate in the first place.
In the wake of the ruling, all eyes will now be on HMRC to see if and how it adapts its approach with regard to assessing IHT made on transfers in ill-health.
In the meantime, and while the industry awaits further guidance, the ruling re-emphasises the importance of ensuring the individuals looking to transfer do so while they’re in good health.
Only pension transfers within two years of an individual’s death are in IHT scope – getting affairs in order as early as possible can help prevent any hurdles further down the line.
