View more on these topics

The Govt’s IHT warning on pension transfers


A recent case has highlighted a controversial approach HM Revenue & Customs applies that can subject a member of a registered pension scheme to unexpected inheritance tax charges following a transfer.

The situation can arise if the member transfers their benefits when they know their life expectancy is impaired and they die within the following two years (or later in certain circumstances).

One of the major problems is it is unclear how HMRC values the taxable sum, as there is very limited guidance in the public domain.

Hearing HMRC’s message

The case involved a woman called Mrs Staveley, who, following a hostile divorce, transferred pension benefits into a personal pension scheme when she was terminally ill in November 2006.

Originally, she had been advised the potential death benefit within HMRC’s allowable limit would have been paid into her estate, thereby making it potentially subject to IHT. Any excess would have been returned to the original sponsoring employer, which was controlled by her ex-husband.

By contrast, the potential death benefit from the personal pension was the full fund value, distributed at the discretion of the scheme administrator, and Mrs Staveley completed an expression of wish form to tell the scheme administrator she would like any death benefit to be distributed to her two sons in equal shares.

In December 2006, Mrs Staveley died without crystallising her personal pension benefits. As she knew she was terminally ill when she made the transfer, HMRC treated it as a “chargeable lifetime transfer” followed by an “omission to act” (by not drawing any personal pension benefits), arguing the two actions were associated and deliberately designed to reduce the value of her estate for IHT purposes. Consequently, they applied an IHT charge.

Mrs Staveley’s legal personal representatives and two sons challenged HMRC. Following a previous first-tier tribunal decision, the Upper Tribunal of the Tax and Chancery Chamber rejected HMRC’s arguments in January.

The court decided any IHT advantage gained from her transfer and not taking any benefits was not intended to confer gratuitous benefit, as the main reason was to prevent any excess element from being returned to her ex-husband’s sponsoring employer.

Precedent set?

Following this judgement, some commentators have argued HMRC will have to change its interpretation of the relevant parts of the Inheritance Tax Act 1984. However, the individual circumstances of this case – where Mrs Staveley was heavily motivated to prevent any money from her pension falling under the control of her ex-husband – do not automatically set a precedent for any future pension transfer case.

While HMRC’s approach could change in the future, advisers in the meantime need to explain to their clients when making a pension transfer could lead to an IHT charge. Consequently, for any client who knows their life expectancy is impaired, advisers should continue to undertake a full appraisal of their situation. A good practice is to assume the worst case scenario,  that is, that the full transfer value is taxable.

All that said, even with the possibility of IHT, a transfer may still be beneficial, for example, if there was no (or a very limited) death benefit payable from the member’s scheme and a much higher one (even after taking account of any IHT charge) payable from the receiving scheme.

Jon Greer is pensions technical expert at Old Mutual Wealth



HMRC loses tribunal appeal over pension transfer IHT rule

HM Revenue & Customs has lost a tribunal appeal that could set a precedent for the two-year inheritance tax rule on pension transfers. The case concerns the estate of woman who transferred her section 32 contract to a personal pension to avoid her former husband benefiting from it. The transfer took place just weeks before the […]


FOS overruled by High Court in Zurich £223k IHT advice damages case

The High Court has ordered Zurich to pay £223,000 in damages to a woman who was given inheritance tax advice by one of its appointed representatives. According to the judgment, the claimant, Angela Lenderink-Woods, was introduced to Allied Dunbar financial planning consultant Huw Davies by one of her daughters in 2001, when she was 80 […]


What’s the IHT position on final salary transfers?

I have been running various adviser events around the country over the last few weeks and a regular question has arisen connected to the rising numbers of final salary transfers. What is the inheritance tax position, especially if the transfer is driven by the desire for better death benefits and the customer is in relatively […]


News and expert analysis straight to your inbox

Sign up


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

  1. One wonders for who much longer pension benefits will be free of IHT I recently went to an CPD session and every speaker highlighted the IHT death benefits.
    Cases like the one above will only Focus the mind of minsters and HMRC especially when the money sections of the press highlight the benefits of surplus pension arrangements been IHT free I feel before long rule will be changed so that benefits surpluses will be brought back into the estate and tax accordingly.

    • Unfortunately I suspect you are probably right, lets face it, if you had to write out a wish list for the best possible IHT planning tool you could possibly think of, a passed on drawdown arrangement would now tick nearly all the boxes.

      Unfortunately I suspect it’s a side effect of politicians making decisions for short term political gain (step forward George Osborne) whilst having no clue as to the ramifications of those changes. Also let’s face it, how many civil servants are experts on tax?

  2. What is unclear from Jon’s article, is what would have happened if Mrs Staverley had chosen to crystallise some of the personal pension? There would then have been no ‘omission to act’, so would have HMRC argued for the same outcome?
    If so would it make sense always to crystallise a small amount to avoid that risk?

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm