UHY Hacker Young | Chartered Accountants
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Pension Transfers and Inheritance Tax

28 January 2019

The Court of Appeal has recently found in favour of a landmark case brought by HM Revenue & Customs (HMRC) that is likely to have a major effect on the way transfers of pensions are treated under inheritance tax rules.

The Court of Appeal’s ruling in favour of HMRC’s appeal means savers in ill-health who transfer their pensions from one scheme to another could be subject to inheritance tax on their pension; receiving a 40% tax bill.

The case, commonly referred to as the Staveley case, saw a woman, Rachel Staveley, attempt to stop her ex-husband from getting any of her occupational pension.

A few weeks prior to her death in October 2006 from cancer, Mrs Staveley transferred her Section 32 pension to a personal pension with AXA. This plan allowed her to nominate her two sons to receive the entire pension fund and would have been exempt from inheritance tax had she survived two years from the date of transfer, as the fund would no longer be part of her estate.

In 2000, Mrs Staveley went through an ‘acrimonious’ divorce with her husband, who was also her employer. Following this divorce, she transferred her occupational pension scheme into a Section 32 policy. If Mrs Staveley had kept her Section 32 pension, part of it would have been passed back to her employer (also her ex-husband), as the rules stated that the employer was entitled to the surplus.

HMRC challenged her decision and applied inheritance tax on the pension fund that passed to her sons. It argued the pension transfer was a chargeable lifetime transfer, or transfer of value, as it was transferred to reduce the value of her estate for inheritance tax purposes.

Staveley’s sons then challenged the tax and the case went to the First Tier Tribunal.

The First Tier Tribunal rejected HMRC’s case in 2017 and this was then backed by an Upper Tier Tribunal ruling. However, following another HMRC appeal, the Court of Appeal has found in favour of HMRC. This means Mrs Staveley’s two sons will pay 40% IHT on the death benefits they received.

The full ruling can be read here.

This is a legacy of an outdated inheritance tax system, which remains off kilter with pension freedoms. Under the current rules, if a pension transfer is made while someone is in ill-health then there is a risk that HMRC will challenge the IHT-free status of the death benefits if the person passes away within two years of the transfer.

Should you wish to discuss IHT implications or pension planning with us, please contact us or speak to your usual UHY adviser.