View more on these topics

Court ruling opens door for higher IHT bills

Pension savers in ill-health are at a greater risk of being hit with a 40 per cent inheritance tax bill after a Court of Appeal ruling in favour of HM Revenue & Customs, experts have argued.

Currently anyone who is in ill-health, transfers their pension and then subsequently dies within two years could see their remaining defined contribution pot hit with an IHT charge.

Almost all transfers are granted an exemption from this charge as long as the transfer was not meant to confer a ‘gratuitous benefit’ on the member. These rules are set out in the 1984 Inheritance Tax Act.

The extent to which transferring members can escape IHT has been challenged by HMRC in a case involving one client, Mrs Staveley.

HMRC argued Mrs Staveley’s decision to transfer her pension and bequeath the money to her children – rather than leave it in the existing scheme and allow her ex-husband to benefit – conferred a gratuitous benefit on them.

The First Tier Tribunal found against HMRC and, crucially, noted “if [HMRC] was right, a transfer from one [personal pension plan] to another [personal pension plan] 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.”

The Upper Tier Tribunal subsequently backed this ruling following an appeal from HMRC – a decision it again appealed.

In a decision made in June this year but only now made public, the Court of Appeal finally found in favour of HMRC.

AJ Bell senior analyst Tom Selby says: “This ruling at best causes major confusion for pension savers in ill-health and at worst risks landing their beneficiaries with a shock 40 per cent tax bill on the money left behind by a loved one.

“It is frankly bizarre that someone who transfers from one DC plan to another now risks being hit with a 40 per cent IHT bill – even if the transfer doesn’t materially change the money that will be passed on if they die within two years.

“This is already something defined benefit members in ill-health can fall foul of, although whether or not this is the case depends on the interpretation of their intentions at the time.”

In January Chancellor Philip Hammond asked the Office of Tax Simplification to review the inheritance tax regime.

The OTS has split its review into two parts, administrative and technical, with its administrative findings to be published around the same time as the Budget on 29 October.

Selby adds: “What we are left with is a complex, nonsensical web of rules which risk layering on extra worry for beneficiaries at a time where they are likely to be suffering from serious emotional distress.

“Instead of allowing court rulings to determine whether IHT is due on retirement funds left behind, the government could radically simplify the system by exempting pensions from IHT altogether.”

Recommended

Sunset-Desert-Arizona-Cactus-700.jpg

FCA sounds climate change warning on pensions

The FCA is proposing new measures to force financial services firms to disclosure how they disclose climate change risk as it zones on in the investments pension funds make. The regulator has released a discussion paper today looking atthe effects that climate change and switching to a low carbon economy will have on the UK’s […]

Royal Court of Justice High Court 480
11

FOS ruling cannot add new duties for Sipp providers, court hears

Upholding a Financial Ombudsman Service ruling against a Sipp provider over due diligence failures would not create new requirements for the market as a whole, a judicial review into the decision has head. A court is currently hearing arguments as Berkeley Burke challenges a ruling that it, as a Sipp provider, could be held responsible […]

5

SJP shares sliding as £100bn AUM mark approaches

Shares in advice giant St James’s Place are “irrationally” undervalued given the firm alone makes up 12 per cent of the advice market, analysts have said. SJP had £96.6bn in assets under management in August and is expected to surpass £100bn when it releases its interim report on Q3 later this month. Shares in the […]

Life begins at…

By Fiona Holmes, proposition communications manager Having reached a certain age (it’s the new 40 by the way), I’m having to come to terms with the fact that my peers and I aren’t as immune from illness or death as we’d like to think. That’s the problem with 30 being the new 20 and 40 […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    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

    Email: customerservices@moneymarketing.com