HM Revenue & Customs (HMRC) is considering to review its guidance on inheritance tax rules after the Office of Tax Simplification (OTS) flagged concerns in this area.
The OTS called on HMRC to produce clearer guidance on a possible IHT liability stemming from pension transfers that are done shortly before death in its review on IHT, published July 5.
Under current rules, anyone who is in ill-health, transfers their pension and then dies within two years could see their remaining defined contribution pot hit with a 40 per cent tax charge.
This is because HMRC considers that it is for the taxpayer to prove that the transfer has been made without an intention to pass on a “gratuitous benefit”.
The OTS stated: “The OTS has heard that the operation of the two year rule regarding gratuitous benefits is causing a high degree of uncertainty for financial advisers because at the time of undertaking such transfers, there can be no certainty as to whether a transfer will be considered to be creating a gratuitous benefit.”
Now an HMRC spokesperson told FTAdviser: “The government is aware that pension transfers made within two years of death can produce complex tax outcomes.
“It will consider the evidence provided by the OTS and respond in due course.
“However, any change would need to take into account the government’s other objectives such as tackling tax avoidance and raising revenue for public services.”
Neil MacGillivray, head of technical support at James Hay, said advisers needed clearer guidance sooner rather than later as they may be opening themselves up to risks.
Mr MacGillivray said: “The uncertainty as to whether these transfers may be challenged are seen as too great a risk and what may be regarded as sensible planning being avoided.
“I am aware of cases where for example, members have consolidated their pensions purely to simplify matters on their death with no intention to confer gratuitous benefit.
"The only actual change has been pension provider, yet HMRC has treated these as a transfers of value.”
The OTS also claimed there was a mismatch between the concerns of advisers and the number of cases which HMRC pursued in these situations.
HMRC has stated that it only pursues a handful of such cases.
But Mr MacGillivray said he doubted that.
He said: “In the instance of only pursuing a handful of cases, it may be that HMRC has big hands.”
The transfer of value issue was the subject of a recent decision in the Court of Appeal.
The case Commissioners for Her Majesty's Revenue and Customs v Parry & Ors, better known as the Staveley case, entered the courts five years ago and centres on the application of IHT on a pension transfer which was done in ill-health.
The Court of Appeal ruled in favour of HMRC in June last year, finding it was right to apply IHT to the transfer, after two tribunals found otherwise.
The case involved a woman, Ms 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, HM Revenue & Customs treated the transfer as a "chargeable lifetime transfer" followed by an "omission to act" as she did not draw any benefits, and applied IHT.
It argued the two actions were linked and designed to reduce the value of her estate for IHT purposes.
In May, the Supreme Court agreed to review this case with the appeal likely to be heard in 2020, although no official date has been set.
It is expected that HMRC will revise its guidance in this are once the appeal process has been completed.
Paul Stocks, financial services director at Dobson & Hodge, welcomed the idea of revised guidance.
Mr Stocks said: “This is indeed an area of concern [and] we give appropriate risk warnings that a pension transfer could become liable to IHT in the event of early death.
"We have long questioned the principles and logic of this (ie, there may well be no ‘loss’ to the exchequer in such circumstances) especially where it’s a DC to DC transfer however a simple set of clear rules would be welcomed."
amy.austin@ft.com
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