The Court of Appeal has found in favour of a landmark case brought by HM Revenue & Customs (HMRC) that will have a profound effect on the way the way the transferral of pensions is treated under inheritance tax (IHT) 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 IHT on their pension and thus receive 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.
In 2000 Staveley went through an ‘acrimonious’ divorce with her husband, who was also her employer. Following this divorce, Staveley transferred her occupational pension scheme into a Section 32 policy, which is a deferred annuity. In 2004 Staveley was diagnosed with cancer.
Prior to her death in October 2006, Staveley transferred her Section 32 pension to a personal pension with AXA. This personal pension allowed her to nominate her two sons to receive the entirety of the pension fund and this would have been exempt from IHT as it was no longer part of her estate.
If Staveley had kept her Section 32 pension, part of it would have been passed back to her ex-husband. This is becuase he also happened to be the employer, and the rules stated the employer was entitled to the surplus.
Staveley did not want her husband to have any of the pension so she transferred it to the personal pension.
A few weeks after she made the transfer into a personal pension, Staveley passed away from cancer.
However HMRC challenged her decision and applied IHT on her personal pension that passed to her sons. It argued the pension transfer was a chargeable lifetime transfer, or transfer of value, as it intended to reduce the value of her estate for IHT purposes.
Staveley’s sons then challenged the IHT 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. However following another HMRC appeal, the Court of Appeal has found in favour of HMRC. You can read the ruling in full here.
Tom Selby, senior analyst at AJ Bell, said: ‘This ruling at best causes major confusion for pension savers in ill-health and at worst risks landing their beneficiaries with a shock 40% tax bill on the money left behind by a loved one.
‘It is frankly bizarre that someone who transfers from one DC (defined contribution) plan to another now risks being hit with a 40% IHT bill – even if the transfer doesn’t materially change the money that will be passed on if they die within two years.’