• The Supreme Court has ruled a pension transfer made within two years of death should not be subject to IHT (https://www.supremecourt.uk/cases/docs/uksc-2018-0208-press-summary.pdf).
• 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 tax charge.
• However transfers are granted an exemption provided the transfer was not meant to provide a ‘gratuitous benefit’ to potential beneficiaries.
• Court decision will make it harder for HMRC to argue a transfer led to a gratuitous benefit.
• Ruling is good news for savers but Government should remove uncertainty by exempting pensions from IHT altogether
Tom Selby, senior analyst at AJ Bell, comments:
“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.”
The Staveley case – key points
The Staveley case centres on 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. A gratuitous benefit is deemed to occur when a particular action is taken in relation to funds with the intention of reducing the inheritance tax applied on those funds.
Essentially, HMRC argued Mrs Staveley’s decision to transfer her pension and bequeath the 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.
The case had previously been heard by three different judges in the lower courts.
The First-Tier Tribunal found against HMRC and, crucially, noted “if [HMRC] was right, a transfer from one [personal pension plan] to another [personal pension plan] for commercial reasons (perhaps to get a better rate of return), without any change in beneficiaries, would be caught. We do not think that this was intended by Parliament.”
The Upper-Tier Tribunal subsequently backed this ruling following an appeal from HMRC – a decision the Revenue again appealed.
But in a decision made in June 2018, the Court of Appeal found in favour of HMRC, once again throwing the tax position into doubt.
The Supreme Court – the highest court in the UK – has now overturned the Court of Appeal verdict and ruled the transfer should not be subject to IHT.
