Last week I introduced the case of Mrs. Staveley in relation to pension transfers made by people in ill health within two years of their death and how an inheritance tax charge could arise. The main charge to consider is that under section 3(1) IHT Act 1984.
HM Revenue & Customs’ general stance is that a pension transfer will not give rise to a transfer of value because the value of the gifted (death) benefit is negligible. However, if it is made at a time when the planholder is in serious ill health, knows as much and dies within two years, then a lifetime transfer of value can arise.
The estate of Mrs. Staveley claimed no transfer of value should arise under section 3(1) because of the exemption in section 10 IHT Act 1984 that there was “no intention to confer a gratuitous benefit”.
The First-Tier Tribunal held that section 10 did apply to the transfer because Mrs. Staveley had no intention to confer a gratuitous benefit when she made the transfer. In fact, her sole intention in making the transfer was to avoid her ex-husband benefiting from the pension proceeds on her death.
In its judgment, the FTT said:
“The entire premise of s 10 is that benefit is conferred. It presupposes that the benefit did not exist before and is newly conferred. If HMRC was right, a transfer from one [personal pension plan] to another PPP for commercial reasons (perhaps to get a better rate of return) without any change in beneficiaries would be caught. We do not think that this was intended by Parliament.”
HMRC appealed against the decision. The Upper Tribunal did not fully agree with the FTT’s analysis above and thought this example was inappropriate. In its opinion, the existence of an expectant benefit under a will cannot prevent the conferring of a lifetime benefit of substantially the same interest and to the same beneficiaries as under the will.
Despite this, however, the UT went on to approve the decision of the FTT in that the section 10 defence would apply. It said:
“In our judgment, therefore, the FTT was entitled on the evidence to find, as it did that the disposition by the transfer of funds from the s 32 policy to the Axa PPP was not intended to confer a gratuitous benefit on any person. The FTT did not, contrary to HMRC’s submission, shut its eyes to the desired destination of the death benefits. To the contrary it clearly took that factor into account.”
The UT did say the FTT was in error in finding it was necessary for a benefit to be a “new” benefit, and that the existing benefit of the sons under Mrs Staveley’s will precluded the benefit under the Axa PPP from being such a new benefit.
However, that did not, in the UT’s judgment, vitiate the FTT’s conclusion that Mrs Staveley’s sole motive was to prevent surplus pension funds reverting
for the benefit of her ex-husband (via Morayford Ltd, a company he controlled).
In summary, the UT said: “Agreeing with the FTT, therefore, we find it has been shown that the disposition by the transfer of funds to the Axa PPP was not intended, and was not made in a transaction intended to confer gratuitous benefit on any person, and that it was made in a transaction at arm’s length between persons not connected with each other. The transfer was accordingly, by virtue of s 10 IHTA, not a transfer of value for the purpose of s 3 IHTA 1984.”
I will conclude this consideration of IHT and pension transfers made within two years of death next week.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn