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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 woman, Mrs Staveley, passed away in 2006 after developing cancer two years earlier.

In cases where a person dies within two years of making a pension transfer, knowing they were in ill-health at the time of the transfer, HMRC designates it a “transfer of value” to decrease the amount of IHT that might be paid because the estate’s value has decreased.

In Staveley’s case, HMRC argued the transfer took place for the purpose of IHT planning because she moved her funds from an IHT environment to a non-IHT environment.

In the initial decision, the tax tribunal disagreed with HMRC, but the Upper Tribunal has now overturned HMRC’s appeal.

AJ Bell platform technical head Mike Morrison says the decision could set a precedent.

Morrison says: “The key principle from the Staveley case is the court has ruled no IHT is due because there was no intention to avoid IHT.

“If this principle is applied to pension transfers from one trust-based scheme to another, then the two-year rule will fall away because there would have been no IHT liability in the first place and so clearly there would be no intention to try and avoid IHT.”



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There are 11 comments at the moment, we would love to hear your opinion too.

  1. This is very interesting as I have recently been wrestling with a situation where a client has a very substantial CETV available and has been considering a transfer. Setting aside for the moment as to whether that is a good idea, the real problem is that he has been a type 1 diabetic for most of his life and suffered from tongue cancer in early 2016. Thankfully, he is in the “all-clear” for now following cancer treatment. However, he does know that this type of cancer has a nasty habit of returning (and perhaps elsewhere in his body). We have no idea as to whether he will survive the next two years (there is an 80% likelihood of this, so we understand) and we are therefore a bit stuck.

    Should he “fold” the £1.5m or so into a private arrangement that is likely to be of benefit to his heirs under FAD rules and but he would be potentially caught by the vague HMRC legislation (there appears to be no definition of “ill-health” – does diabetes count? I’d like to know as I’m type 2). Stick with the DB scheme (£35,000 per annum pension) and die very soon after retirement – that’s not a good deal in the light of FAD.

    I really don’t want to disadvantage the client or his heirs, but neither would my PI insurers wish my to inadvertently trigger an IHT liability of around £800,000 (taking into consideration other assets).

    Maybe this case can clarify this obscure, but rather worrying, situation!

    • Hi Mark, I know that there are plans from various technical sources to try and clarify what they think the implications of this are, however ultimately at the end of the day HMRC will always be able to challenge situations.

      From what you’ve mentioned, I would make a couple of observations, bearing in mind my wife is a Type 1 diabetic and has been since age 4. Type 1 is an auto immune condition, that these days, doesn’t necessarily have a significant impact of life expectancy, if it’s well managed. Where the issues lie for older people is that the ability manage it in the past was much less than it is now and it is therefore likely to impact their life expectancy.

      I read through this ruling yesterday and came to the conclusion that the court made their judgement based on the specifics of that particular case and that their decisions might not necessarily be reflected in other cases. Although it does appear to set a precedent around the second part of the judgement, where the discretion of the pension trustee was the deciding factor.

      However on the upside, I would make the following observations. Any loss of value for IHT purposes for someone expecting to take an “income” from a DB scheme, where their life expectancy could be viewed to be extremely limited would seem to have to be limited to the value of that expected income and that the estate didn’t receive it. So to my mind, the amount that could be viewed as potentially subject to IHT would usually be very small in comparison to the “value” of the pension transfer.

      As such in your specific clients case, as long as I am not mis-interpreting that section of the appropriate act, even if it were found to trigger an IHT liability the amount assessed would be likely to be much less than the CETV.

      When you also consider that the client would potentially lose out by taking the scheme pension, rather than the CETV (due to life expectancy), there would seem to be good drivers to justify the recommendation, as long as it is caveated with the appropriate warnings about the potential triggering on an IHT liability.

      If the client lasts 2 years after the transfer, then they would appear to be in the clear, but if they don’t, then they would still appear to be miles better off even if an IHT liability was then due on the whole transfer value.

      Just my thoughts.

    • Is the spouse alive? Would IHT apply if the spouse is ultimately the beneficiary…worth checking?
      Whilst IHT may apply as long as you make this clear and explain the level of potential liability then you should be OK if the clients are fully informed.
      What would be left of the pension pot after the IHT liability…. £900,000 assuming he has some form of pension protection for the £1.5m value??? versus £17,500 for the spouse (which is taxed at her marginal rate) whereas the £900,000 is tax free if he dies prior to age 75. (other than the potential IHT)

    • Mark,

      As long as you cover both scenarios off, I don’t think your PI will have an issue. Surely the calculation in the short term is 60% of TV versus 2 x £35K pa & DB death benefits (Assume IHT is levied), & then 2 years + is full TV v DB benefits, less any LTA issues??

  2. This case was discussed recently at the PFS Regional Conference I attended.
    The crux of the issue was that Mrs S wanted her Son to inherit her pension not her ex-husband, yes, she was ill, but it was never really about the IHT!
    Unfortunately, HMRC decided that’s the angle they would take and the facts of the case have disproved that! Thank heavens for common sense in this respect.
    However, I don’t believe this will set a precedent and clients should be made fully aware of HMRC’s right and willingness to dispute cases where death occurs within the 2-year window

  3. Harriet Quiney, DWF LLP 25th January 2017 at 10:46 am

    Dear Mr Meldon, if you carefully explain the risks of a pension transfer/HMRC challenge to your client in writing and he decides to go ahead, then if HMRC does challenge the arrangement, your client’s estate will not be able to challenge what you have done and there will be no claim on your PII.

  4. Surely the key is – what is best for the client – document all the options and you should be confident in your advice, and prepared to defend it if necessary. Dont let the IHT/Tax issue wag the dog.

  5. Nick, I agree with you
    Any pension transfer advice should reflect the client’s objectives, once assessed and advice given based on these, then both the advantages and the disadvantages, i.e. the possible IHT implications of the recommendation should be ‘loud and proud’ in the suitability report.

    If they are not, then a suitable recommendation could quite quickly become ‘unsuitable’ from both the FCA’s and HMRC’s perspective either on review, subsequent death or customer complaint

  6. I appreciate all of your comments; thank you! My client is still rather in “denial” about his prognosis and the matter, unfortunately, is in abeyance for now (not the right call, but that is his choice). I have asked “MoneyBox” to try and find out how much, if anything, has actually been taken by HMRC in these circumstances. We shall see.

  7. Tony Chamberlain 1st February 2017 at 4:36 am

    Please excuse my ignorance, for I was an IFA of 18 years in the UK, but have been an adviser in New Zealand for the last 11 years and can’t always keep up with UK orientated issues. However, for Mark’s client, might not a belt and braces approach of effecting life cover of GBP800K over two years, in trust, cover the potential IHT liability? I am afraid, that unless the UK authorities have dramatically changed since I was there, I would not trust the course of action suggested by Harriet to offer any form of protection nor consolation – sorry Harriet, call me an old cynic, but as somebody much wiser than me once said; ‘the law is an ass!’

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