• The Supreme Court has agreed to review a crucial case on the application of IHT on pensions transferred in ill-health
• Under current rules anyone who is in ill-health, transfers their pension and then dies within two years could see their remaining defined contribution (DC) pot hit with a tax charge
• However almost all transfers are granted an exemption provided the transfer was not meant to provide a ‘gratuitous benefit’ to potential beneficiaries
• The extent to which transferring members can escape IHT has been challenged in three Courts by HMRC in the Staveley case
Tom Selby, senior analyst at AJ Bell, comments: “Thirteen years after Mrs Staveley passed away and five years since the case first went in front of a Judge, savers are now finally on the cusp of some clarity on the tax treatment of ill-health pension transfers. Whether that clarity will be positive or negative remains to be seen, however.
“If the Court of Appeal ruling from 2018 is upheld then DC pension transfers risk being hit with a tax charge where the member dies within two years even where the primary motivation was to change provider or lower annual charges.
“This protracted case has exposed the complexity and confusion that exists around pensions and IHT. Recently published research on behalf of the Government 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. Regardless of the Supreme Court ruling, 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 can be used to exempt pensions transferred in ill-health from IHT.
Essentially, HMRC argues 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 has already been heard by three different judges.
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 last year, 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 agreed to consider the case. A date for the hearing will be confirmed in due course.
