HM Revenue & Customs (HMRC) has been urged to clarify the circumstances when inheritance tax (IHT) will apply to pension transfers.
Jessica List, pension technical manager at Curtis Banks, said the fact HMRC has not issued clear guidance on the matter meant advisers were in the dark about a controversial rule, which urgently needed clarification.
She said the high volume of transfers currently taking place, including defined benefit transfers, only fueled the need for action from HMRC.
Ms List said HMRC had faced calls to update its guidance to make it clearer when inheritance tax would apply following a tribunal case, but to date has failed to act.
The issue stems from a tribunal case in January, which HMRC lost.
The case involved a woman, Mrs Staveley, 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 any inheritance tax advantage gained from the transfer was "not intended to confer gratuitous benefit", and therefore rejected HMRC's appeal.
Ms List said: "The outcome of the Staveley case, and the fact that HMRC has not updated its guidance in light of it, has left advisers unsure when inheritance tax could apply to a pension transfer case.
"It is not clear whether the tribunals’ reasons for overruling HMRC and stating that inheritance tax did not apply could also hold true in other cases."
Ms List said the issue had “always felt like something of a grey area”.
“HMRC’s stance, that transferring to a scheme with administrator discretion over death benefits removes the right to those benefits from the individual’s estate, seemed contentious at best.
“There was also a lack of case law available. Mrs Staveley’s case garnered so much attention not only because it showed that HMRC would apply IHT in the controversial way suggested, but also because this decision was overturned by two tribunals,” she said.
At the very least the tax office should give better information about the factors which may affect a decision, she said.
Ms List said: "In the Staveley case the tribunals ruled that IHT did not apply because Mrs Staveley did not complete the transfer in order to ‘confer a gratuitous benefit’ on her beneficiaries (her sons).
"They stated that it was clear that Mrs Staveley only transferred to prevent her ex-husband from benefiting, and that her sons would have received the benefits from the original policy through her estate anyway."
But it was unclear whether the same logic would apply in a comparable scenario, she said.
"What if, for example, an individual had transferred to a new scheme for greater investment options and kept the same beneficiaries under the new pension," she said.
"Now that HMRC’s stance has been successfully challenged, advisers need updated guidance so that they know when IHT might apply and what kind of factors they need to consider."
Provider Scottish Widows had wrote to HMRC about this issue in May.
Without clear guidance, Scottish Widows claimed advisers were left uncertain over whether their clients were at risk of having hefty taxes charged to their estates.
An HMRC spokesperson said: “The existing tax guidance on lifetime transfers of pension scheme death benefits correctly sets out HMRC’s position.
“HMRC keeps all guidance under review, including taking legal developments into account.”
carmen.reichman@ft.com
