The case involved a woman called Mrs Staveley, who, following a hostile divorce, transferred pension benefits into a personal pension scheme when she was terminally ill in November 2006.
In December 2006, Mrs Staveley died without crystallising her personal pension benefits. As she knew she was terminally ill when she made the transfer, HMRC treated it as a “chargeable lifetime transfer” followed by an “omission to act” (by not drawing any personal pension benefits), arguing the two actions were associated and deliberately designed to reduce the value of her estate for IHT purposes. Consequently, they applied an IHT charge.
Mrs Staveley’s legal personal representatives and two sons challenged HMRC. Following a previous first-tier tribunal decision, the Upper Tribunal of the Tax and Chancery Chamber rejected HMRC’s arguments in January 2017. The court decided any IHT advantage gained from her transfer and not taking any benefits was not intended to confer gratuitous benefit, as the main reason was to prevent any excess element from being returned to her ex-husband’s sponsoring employer.
The court of appeal has now overturned that ruling in favour of HMRC.
Ian Browne, pension expert at Quilter comments:
Law is on the side of HMRC, however, that doesn’t make the current rules around pension death benefits any less cruel. They essentially penalize people who have a terminal illness for good financial planning.
This is a legacy of an outdated inheritance tax system, which remains off kilter with pension freedoms.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. In the upcoming Budget and Inheritance Tax Review the Chancellor has the power to set this glaring discrepancy straight.
The situation arises if the member transfers their benefits when they know their life expectancy is impaired and they die within the following two years (or later in certain circumstances).
However, at the moment for anyone who knows their life expectancy is impaired, they should assume a full transfer value is taxable. However, even with the possibility of IHT, a transfer may still be beneficial, for example, if there was no (or a very limited) death benefit payable from the member’s scheme and a much higher one (even after taking account of any IHT charge) payable from the receiving scheme. Getting financial advice can help people navigate this convoluted system.