Providers have criticised a judgment in favour of HM Revenue & Customs over the extent to which inheritance tax can be applied to pension pots, saying the rules were "bizarre" and "cruel".
The case involved a woman, Mrs Staveley, who, after an acrimonious divorce, transferred a portion of a pension she had set up with her husband into a new pot and bequeathed it to her children. She died a few weeks later.
Because the woman was terminally ill, HMRC treated the transfer as a "chargeable lifetime transfer" followed by an "omission to act" as she did not draw any benefits, and applied inheritance tax. It argued the two actions were linked and designed to reduce the value of her estate for IHT purposes.
But the woman's estate argued the transfer was exempt because it was not meant to confer a "gratuitous benefit".
The Court of Appeal has now found in favour of HMRC, overturning a previous decision by the first tier tribunal and the upper tier tribunal.
In her ruling Lady Arden concluded finding in favour of Mrs Staveley would have been contrary to Parliament's intentions when it passed the rules set out in the Inheritance Tax Act 1984, which established the rules on gratuitous benefits, because it placed the onus on the donor to prove they did not intend to confer such a benefit.
This means in the eyes of court Mrs Staveley's estate had failed to prove the transfer was not made with a view to limiting inheritance tax.
She said: "There was no doubt a deliberate placing of the onus on the donor in these circumstances because there will be many cases where the relevant evidence about what the donor intended is not in HMRC's hands, and so difficulties in recovering IHT and the scope for possible abuse are obvious.
"Parliament would, moreover, surely not have intended liability to IHT to depend on whether a prior gift had been made (which may have been, as in this case, of no value when made) and revoked, and then remade (potentially, as in this case, in a much more advantageous form) at a time when it is of considerably greater value."
But the ruling has raised concerns savers in ill-health could be at greater risk of being hit with a 40 per cent IHT bill if they transfer their pension and then die within two years.
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 per cent tax bill on the money left behind by a loved one.
"It is frankly bizarre that someone who transfers from one DC plan to another now risks being hit with a 40 per cent IHT bill – even if the transfer doesn’t materially change the money that will be passed on if they die within two years."