Upper Tax Tribunal to hear appeal over IHT on pension transfer

Her Majesty’s Revenue & Customs (HMRC) has appealed a ruling from the Lower Tax Tribunal that a pension transfer was not a ‘transfer of value’ for Inheritance Tax purposes even though the member was in ill-health and passed away soon after the transfer.

The current position

Many pension schemes are written under trust, which means that those funds fall outside of the member’s estate. As a result, any death benefits distributed from the pension will not be subject to IHT. This makes them an important tool in any estate planning exercise.

However, financial advisers will also be aware of the potential pitfall that exists when a client dies within two years of making a pension transfer having known they were in serious ill-health at the time of the transfer.

In this scenario, HMRC may deem it to be a ‘transfer of value’ under section 3(1) of the Inheritance Tax Act 1984. In other words, it is a disposition made by an individual, the result of which is that the value of their estate has decreased, thus reducing the amount of IHT that is potentially payable.

For many years, HMRC has taken the view that a transfer from one scheme to another is a transfer of value. Their (perhaps somewhat curious) reasoning is that the member had the choice to transfer their pension rights to a scheme under which the estate would have been entitled to the death benefits. By choosing to transfer the pension rights to a scheme whereby the death benefits are distributed at the scheme administrator’s discretion, the member has effectively brought the pension rights into their estate and then moved them out again.

There is, however, an exemption in section 10 of the 1984 Act. This states that if the transfer was not intended to confer a gratuitous benefit on any person, it will not be a transfer of value. HMRC’s position is that if the member was in ill health and their intention was to benefit others, then the exemption will not apply if the member dies within two years of the transfer.

Parry and Others v HMRC

The current case is interesting, not least because it took place in 2014 and seems to have been largely overlooked. More importantly, it addressed the issue of whether a transfer by a member, made knowingly when in ill-health and when the member died shortly after, could be considered a transfer of value.

The case concerns the estate of a Mrs Staveley (for which Mr Parry was an executor). She was a member of an occupational pension scheme where the principal employer was a business that she had previously set up with her husband.

Following an acrimonious divorce in 2000, Mrs Staveley transferred her pension rights from the occupational scheme into a Section 32 policy. The scheme had been overfunded, and the terms of the Section 32 policy meant that any overfunded benefits could be returned to the employer.

Mrs Staveley was very keen that her former husband and his business did not benefit in any way from her pension. One way to do this was to transfer the Section 32 to a personal pension. At the time immediately following the divorce, the rules were such that she would have had to wait ten years before making the transfer.

However, the rules changed in 2006, and she effected a transfer in November of that year to a personal pension. Meanwhile, Mrs Staveley had developed cancer in 2004, and she passed away in December 2006, a matter of weeks after the transfer.

The legal arguments

HMRC followed their current stance and assessed the pension transfer as a transfer in value for IHT purposes. They pointed out that the death benefits under the Section 32 would have been payable to Mrs Staveley’s estate, yet under the personal pension they would have been paid out subject to the scheme administrator’s discretion. In other words, she moved the funds from an IHT environment to a non-IHT environment.

At the Tribunal, HMRC put forward two arguments. (1) The purpose of the transfer was for IHT planning. (2) Furthermore, the intention was to confer a gratuitous benefit on her two sons (who had been named in the expression of wish).

The Tribunal did not agree. The evidence suggested that Mrs Staveley’s motivation behind the transfer was to ensure that the pension funds did not make their way back to her former husband. There was no evidence in any correspondence with her advisers that IHT planning had played a role.

On the second point, her sons were already the beneficiaries under her will. Therefore, they would have received the death benefits either way. In this sense, the Tribunal did not agree that a benefit had been conferred on them. It was already a benefit to which they were effectively entitled.

The Tribunal noted that the transfer of funds from an IHT environment to an IHT-free environment did confer a benefit on Mrs Staveley’s sons (insofar as they could receive the funds without any deduction for IHT). However, they concluded that the conferring of an IHT benefit was not Mrs Staveley’s intention.

The following section from the Tribunal report is perhaps the most indicative of their view.

The entire premise of Section 10 is that a benefit is conferred. It presupposes that the benefit did not exist before and is newly conferred. If [HMRC] was right, a transfer from one PPP to another PPP 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.

HMRC disagreed, and they have appealed to the Upper Tax Tribunal. This was scheduled to be heard mid-February, and we look forward to reading the outcome in the next month or two.

In the meantime, it will still pay to be prudent when advising clients in this type of scenario, certainly while we are awaiting the outcome of the appeal. But we can be cautiously optimistic that where a transfer is to take place for commercial reasons and the beneficiaries remain the same, then regardless of the member’s health it will not be caught for IHT purposes.

Head of Platform Technical

Mike Morrison has worked in financial services for far too many years. In 1990 he joined Winterthur (now AXAWealth) as Technical Manager, playing an instrumental role in the development of their SIPP product and later their pioneering work on income drawdown.

Mike is an ex Chairman of AMPS (the Association of Member Directed Pension Schemes) and is on the Financial Planning Committee of the ICAEW. He is also an Associate of the Pensions Management Institute and the Chartered Insurance Institute, and he holds both an LLB and an LLM in European Law.

An accomplished speaker and writer on financial services matters, Mike is passionate about retirement and savings issues, and how we can better communicate these to a wider audience.