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Tony Wickenden: Beware the pension transfers IHT trap

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It has always seemed mad that a transfer of value for inheritance tax purposes could take place from one pension fund to another when, in relation to the pension arrangements from and to which the transfer is being made, amounts payable on death would be IHT free.

In other words: the net IHT result for the member and their beneficiaries would be the same after the transfer as before.

Before I get all confrontational, though, let’s be clear that a transfer of value would not arise where the member does not die within two years. The assumption is that the purpose of the transaction is to deliver benefits for the member, so any transfer can be ignored. However, if the member knew they were in serious ill health at the time of the transfer and died within two years of it being made, then a transfer of value could arise. But, to my point above, why?

HM Revenue & Custom’s practice on this is set out in the Inheritance Tax Manual on page IHTM17070. It states that, where a transfer between two registered pension schemes takes place under the above circumstances, HMRC will view it as a loss to the transferor’s estate. Consequently, a chargeable lifetime transfer will arise and HMRC may seek IHT as a result.

There may even be a chargeable lifetime transfer where the pension death benefits are ultimately paid to a spouse or civil partner. This is because the transfer will be treated as made to the discretionary trust that underpins the receiving pension scheme, so the spouse exemption will not apply.

It seems HMRC’s conclusion is based on the grounds that the member could have made a transfer to a pension arrangement that provided for the death benefits to pass to the deceased member’s estate.

A recent case concerning the estate of a Mrs Staveley (deceased) has brought all of this very much to the fore. In the case ((2017) UKUT 0004 (TCC)), Mrs Staveley owned a section 32 pension plan, which she transferred into a personal pension plan. Unfortunately, the transfer took place at a time when she knew she was in serious ill health. On her death a short time afterwards, HMRC claimed IHT on the basis there had been:

  • A transfer of value under section 3(1) IHT Act 1984, which reduced her taxable estate at the time of transfer; and
  • An omission to exercise a right with the intention of deliberately increasing the estate of another under section 3(3) IHT Act 1984, which led to a lifetime transfer of value immediately before death. This is on the basis that Staveley could have taken retirement benefits but chose not to. Thus, the value of the pension fund (which passed free of IHT under the discretionary trust) increased.

The beneficiaries under Mrs Staveley’s will were her two sons. They were also the nominated beneficiaries that received the death benefits under the personal pension plan on her death.

The case was unusual in its facts because it was clear that Mrs Staveley’s prime reason for making the transfer was to prevent her ex-husband directly or indirectly getting any benefit at all from her pension plans on her death (which could have happened under the section 32 pension plan – at least before April 2006). This case was an appeal to the upper tribunal from a decision by the first-tier tribunal. I will look at it in more detail next week.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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