The Supreme Court has ruled a pension transfer made in ill health was not liable for inheritance tax in a landmark case coming to a close after six years.
In its final judgment in the Commissioners for Her Majesty's Revenue and Customs v Parry & Ors case, better known as the Staveley case, the Supreme Court ruled this morning (August 19) HMRC was not right to charge IHT on the claimant's pension transfer, though it was right to charge it on what HMRC deemed an 'omission of benefits'.
Industry experts expect the ruling to set a precedent for ill-health transfers going forward.
The case involves 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. But the woman's estate argued the transfer was exempt because it was not meant to confer a "gratuitous benefit".
This case has divided courts with the Court of Appeal ruling in favour of HMRC in June 2018, finding it was right to apply IHT to the transfer as well as on Ms Staveley’s omission to draw any benefits, after two tribunals beforehand had found otherwise.
The Supreme Court today partially upheld the Court of Appeal's judgement, though it found the transfer and omission were not linked as part of an overall plan as Ms Staveley could have left her sons her death benefits without the transfer.
The court said IHT could be charged on the omission, as it was the main cause of increasing her children’s share of her estate but could not be charged on the transfer itself as it “had not been motivated by any intention to improve the sons’ position”.
It added: “[Ms] Staveley’s sole intention in transferring the funds was to eliminate any risk that any part of the funds might be returned to her ex-husband.
“The mere fact that the sons’ inheritance was intended to be enjoyed in a different legal form after the transfer did not mean that [Ms] Staveley intended to confer a gratuitous benefit her sons.”
Under current rules anyone who is in ill-health, transfers their pension and then dies within two years could see their remaining pot hit with a 40 per cent tax charge.
An HMRC spokesperson said: “We are pleased that the Supreme Court upheld HMRC’s view of the tax rules in this case and are carefully considering the implications of this decision.”
Much needed clarity
Tom Selby, senior analyst at AJ Bell, said today's judgment brings certainty to those in ill-health looking to pass on their pension pots to loved ones.