Inheritance Tax (IHT) is extremely confusing for clients. However, the latest ruling from the Supreme Court provides clarity over whether pension transfers should be subject to an IHT charge.
Under current rules, any pension transfer made by someone who subsequently dies within two years of the transfer could result in the remaining defined contribution pension pot being subject to an Inheritance Tax charge. This is charged at 40%.
There are some exceptions to the rule, but that is only when the transfer is judged to not have been made with the purpose of providing a ‘gratuitous benefit‘ to any potential beneficiary.
The Staveley case which has recently been heard in the Supreme Court has resulted in the exceptions to the rule being upheld, as they judged that IHT couldn’t be charged on the transfer of funds.
Re-cap of the Staveley Case
Ms Staveley and her husband set up a pension together. Following a difficult divorce, Ms Staveley transferred part of the pension into another pot, with the sole aim of allowing her children to benefit from the money and not her ex-husband.
During the time of the transfer, Ms Staveley was terminally ill, and sadly passed away a couple of weeks after the transfer had occured.
HMRC treated the transfer as a ‘chargeable lifetime transfer’ followed by an ‘omission to act‘ as she never utilised any of the transferred funds.
HMRC argued that her transfer didn’t fall under the ‘gratuitous benefit‘ rules as her aim was to help her children financially, so HMRC taxed the transfer.
What ensued was a legal battle with Judges siding with either HMRC or the children who brought forward the claim.
John Fitzsimons, explained what happened next when he wrote in the loveMoney publication:
“The First-Tier Tribunal found against HMRC.
“In its judgement it said that had the taxman been right, a transfer from one pension plan to another for commercial reasons ‒ for example getting a better rate of return ‒ without any change in beneficiaries would be caught by these rules, arguing this was clearly not the intention of Parliament when passing the relevant legislation.
“This ruling was appealed by HMRC, but backed by the Upper-Tier Tribunal. The taxman appealed once more, and this time the Court of Appeal backed the HMRC position.
“Now the Supreme Court, which is the highest court in the land, has partially overturned the Court of Appeal. It judged that Inheritance Tax could not be charged on the transfer of the funds, since this had not been motivated by any intention to improve the sons’ financial position.
“Instead it determined that her intention in transferring the funds was to ensure that her ex-husband didn’t get any of the money.
“In the judgement, the Supreme Court said: “The mere fact that the sons’ inheritance was intended to be enjoyed in a different legal form after the transfer did not mean that [Ms] Staveley intended to confer a gratuitous benefit on her sons.””
Although this news is welcomed, those in the profession feel more can be done.
Tom Selby, Senior Analyst at AJ Bell commented:
“This protracted case has exposed the complexity and confusion that exists around pensions and Inheritance Tax.
“Research has exposed a gaping lack of understanding when it comes to gifting and Inheritance Tax, 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 Inheritance Tax altogether.”
