Supreme Court rules ill-health pension transfer is not liable for inheritance tax

20 August 2020

The Supreme Court has ruled that a pension transfer made in ill health was not liable for inheritance tax (IHT), six years after the case first went to court.

In its final judgment in the Commissioners for HM Revenue and Customs v Parry and Others case, the court ruled that HMRC was not right to charge IHT on the claimant’s pension transfer, which was made within two years of death.

Mrs Rachel Staveley, prior to her death in 2006, transferred her pension fund from a company pension under section 32 of the Finance Act 1981 into a personal pension plan. If she had remained in the company pension scheme, her pension would not have attracted IHT, however, upon transferring it into a personal plan, the fund became liable for government tax.

The case, brought to the Supreme Court, found that the purpose of this transfer, prior to Mrs Staveley’s death, was actioned to prevent any pension funds reverting to the business whom the private pension was held with and consequently provide funds for her divorced husband, who is a partner at the business which they had both founded.

Mrs Staveley was terminally ill with cancer at the time of the transfer and as such, HMRC treated the transfer as a transfer of value, followed by an omission to act as she did not draw any benefits in the course of her lifetime.

It was decided that this transfer was not intended to reward funds to her sons, the beneficiaries primarily, but rather to avoid the funds going into the business’ hands.

Despite this, the court found that the decision to neglect income benefits during Staveley’s lifetime did create an increased value of the funds, however, HMRC appealed this, and the appeal was allowed.

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 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. As always, financial advice is key.”

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.

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