IHT, Ill health and pension transfers - Staveley rumbles on

Staveley will be a familiar name to many. The test case for IHT treatment of pensions following transfer in ill health has been in the news many times since Mrs Staveley’s passing all the way back in December 2006.

Now, 12½ years after her death, we still don’t have a definitive answer as to the circumstances when IHT will apply on ill health pension transfers. This case has been through first tier and upper tribunals, and the Court of Appeal, with the decision being flipped each time. HMRC won the latest ruling in June last year, with IHT applying. However, we have now had confirmation that the estate has been given leave to appeal and the case will be heard in the Supreme Court.

We don’t have a date for a hearing yet, and given the time taken for decisions to be published, the outcome isn’t going to help you with advising clients any time soon, but it will certainly be useful when we have something more ‘final’.

Of course, the whole issue would be far simpler if we could take pensions out of IHT altogether.

At the time of writing, we are also awaiting the second report from the Office of Tax Simplification following their Inheritance Tax review – due spring 2019. This promises to look at ’areas of complexity’, which includes pensions. The Staveley case highlights just how complex IHT can be.

In our response to the review, and subsequent meeting with the OTS, we put forward the case for removing pensions from IHT completely (with one exception). In the vast majority of cases IHT doesn’t apply, so the loss to the Treasury is unlikely to be significant. By allowing binding nominations, we could massively simplify the process of distributing death benefits, saving bereaved clients money, time and unwanted stress.

The removal of IHT would also give those in ill health the freedom to transfer without fear of putting their funds into their estate. It seems perverse that even a PP-to-PP transfer runs a risk of being hit where the member has health issues, and is a barrier to transfer.

The sole exception that would need to stay is for those in ill health suddenly putting all their assets into a pension on their death bed; clearly this would be avoidance so needs to remain.

We await with interest to see which changes the OTS recommends are made. If sweeping changes are made by the government, then the Staveley final decision may not be so crucial after all, but in the meantime the guessing games continue.

Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.