The future of a controversial rule that subjects some pension transfers to hefty inheritance tax charges has been called into question, after the Upper Tribunal rejected an appeal by HM Customs & Revenue.
The case in question involved a woman who, following an acrimonious divorce, transferred a portion of a pension she had set up with her husband into a new personal pension.
A few weeks after making the transfer, the woman died.
Because the woman was terminally ill, HMRC treated the transfer as a "chargeable lifetime transfer" and applied inheritance tax.
The woman's estate challenged HMRC and won. HMRC appealed and lost.
The court ruled that any IHT advantage gained from the transfer was "not intended to confer gratuitous benefit", and therefore rejected HMRC's appeal.
James Hay technical director Neil MacGillivray said the current rules were "unfair", and said HMRC would have to issue new guidance as a result of the ruling.
He added that, while in Mrs Staveley's case there was an IHT advantage in making the transfer, in most cases there was not.
"People can completely innocently transfer from one pension to another, and HMRC has decided that for that small fraction of time, you could transfer that money into your estate."
Mike Morrison, head of platform technical at AJ Bell, added: “The Staveley case is interesting because it involved a Section 32 pension where death benefits were likely to have been subject to IHT.
"So the transfer was actually from a scheme with a potential IHT liability to one with no IHT liability.
"Most pension transfers will be from one trust based scheme to another, so there is no IHT liability in either case. However, HMRC takes the view that the transfer could have been made to a scheme where there would be an IHT liability and hence IHT becomes due if the member dies within two years.
He said the "key principle" from the Staveley case was that the court had ruled that no IHT is due because there was no intention to avoid IHT.
The intention, he said, was clearly to prevent the estranged husband getting access to the funds.
"If this principle is applied to pension transfers from one trust based scheme to another, then the two year rule will fall away because there would have been no IHT liability in the first place and so clearly there would be no intention to try and avoid IHT."
He said it would be interesting to see if there was further appeal to the Staveley case.
"If not, we would call on HMRC to issue some guidance that advisers and their clients can rely on for pension transfers more widely.”
james.fernyhough@ft.com