Published On: Wed, Aug 19th, 2020

Inheritance tax: HMRC forced to drop IHT charge on some pension transfers – full details | Personal Finance | Finance

Inheritance tax (IHT) rules can be very complex which is evidenced by a recent appeal heard by the Supreme Court. In what is now known as “The Staveley case”, a precedent has been set which could have huge ramifications for both pension and estate planning.

Essentially, the Staveley case centred on the extent to which ‘gratuitous benefit’ rules set out in the 1984 Inheritance Tax Act mean that pensions transferred in ill-health are subject to IHT.

A gratuitous benefit is deemed to occur when a particular action is taken in relation to funds with the intention of reducing the IHT applied on those funds.

The Supreme Court broke down the history of this case in their decision which was released today: “During her marriage, Mrs Staveley and her husband set up a company.

“She had a pension fund with the company’s occupational scheme, and this fund was transferred to another pension scheme (‘the pension scheme’) for her when she and her husband divorced.

READ MORE: Inheritance tax: These assets can have IHT levied on them – full list 

“After her death, the death benefit was paid to them.

“Her Majesty’s Revenue and Customs (‘HMRC’) determined that inheritance tax was due on the death benefit, on the basis that both the transfer of funds from the pension scheme into the PPP, and Mrs Staveley’s omission to draw any benefits from the plan before her death, were lifetime transfers of value within section 3 of the Inheritance Tax Act 1984 (‘IHTA’).

“The issue in this appeal is whether HMRC were right to take that view.”

The case had previously been heard by three different judges in the lower courts, with the various courts being divided on their judgements.

However, in a decision made in June 2018, the Court of Appeal found in favour of HMRC, making it hard to find clarity for this complicated issue.

Despite this, the Supreme Court, who hold the highest authority in the UK, has now overturned the Court of Appeal verdict and ruled that the transfer should not be subject to IHT.

Tom Selby, a senior analyst at AJ Bell, commented on the ruling: “After years of wrangling in the courts this ruling finally brings some certainty to people who transfer their pensions while in ill-health.

“If the Court of Appeal ruling from 2018 had been upheld then DC pension transfers would have been at greater risk of being hit with a tax charge where the member died within two years of the transfer where the primary motivation was to change provider or reduce annual charges.

“This protracted case has exposed the complexity and confusion that exists around pensions and IHT.

“Research has 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 and the common sense solution to this complexity would be to remove pensions from IHT altogether.”

Similar sentiment was expressed by Clare Moffat, the head of intermediary development and technical at Royal London: “The Supreme Court decision in the Staveley case has clarified that intention is crucial when a pension transfer or switch is made in terminal ill health.

“Where there is an intention to give benefits which didn’t exist before, such as a DB to DC transfer, it will be subject to IHT.

“But a discretionary DC to DC switch may be completed without worry of IHT if it is for genuine commercial reasons and the beneficiaries on the expression of wish form stay the same. As always, financial advice is key.”

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