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Tony Wickenden: Why HMRC lost its appeal on pension transfer IHT rule

Tony Wickenden 700x450

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


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. It is difficult to draw any practical or general conclusions from this case. It was all down to the very specific circumstances. Engineering a client situation to get the same result is likely to end in tears and a claim.

  2. It would have been good if they could have written it up in English..

  3. It would appear on the face of it that the IHTA 1984 Act and application of a lifetime transfer for HMRC purposes – pre supposes that over the term of his contribution he must have known he was going to die – but not when ? Once he does know this it seems a bit severe the tax man would wish to deprive his kith and kin from the pension fund ( or its income). It would appear this is not in the spirit of the Law ? Many people in old style schemes arranged by insurance companies who failed to continue to look after their clients are leaving them without contact or care, or kept up to date (and I work on the principle it is the clients duty first to look after their own money and their financial adviser whether restricted or Independent – if they can afford one). On the basis of old style schemes the loss of ones money into a pension arrangement is deemed to be “lost money” rather than a benefit. In many ways a fund built up in a pension fund is for the “protection”, of client and his family – alongside term assurance which would normally cease at age 60 or 65 or earlier ( due to cost and poor advice by the insurance company and their agent – in the early years). Whilst the CONservative party are guilty of raiding peoples pension funds by recklessly permitting them to take their entire fund – then attacking it with the imposition of Income Tax – thereby reclaiming the income tax paid in over the decades – this is the Robert Maxwell and his ilk type of the treacherous – the un -skilled Government Pension Ponzi scheme brought in by the CONservative Government. These changes were implemented by Government changing legislation for their own use – rather than for the benefit of the voting public who are being ripped off. Where is the Government Regulator ?

  4. Good decision overall. When I first read of this case, it was apparent to me that it was conducted at arms length with regards the actual reason for the transfer progressing. Clearly however, no precedent has been set.

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