Why is Staveley important for advisers when it comes to transfers and switches?

Clare Moffat, Head of Business Development at Royal London, breaks down the recent Staveley case and why advisers should take note.

HMRC v Staveley and Piney (2018): the background

This case dates back to 2005/2006. So why is it important today? Because there are implications for clients who transfer or switch in ill health, then die within 2 years. There’s been an increase in cases like these since pension freedoms, as a means of accessing death benefit flexibility and passing wealth down through the generations.

This is a hot topic, and isn’t just relevant for defined benefit (DB) to defined contribution (DC) cases but also for DC to DC.

What happened in the case?

Mrs Staveley had a section 32 policy with a feature meaning any surplus in the policy would pass back to her employer (who happened to be her ex-husband) on her death. She found out she was terminally ill and died on 18 December 2006. In November 2006, she transferred funds from her section 32 policy into an AXA PP. This meant the death benefits were moving from a return of fund payable to her estate, to a return of fund paid at scheme administrator discretion. Mrs Staveley’s two sons were the beneficiaries under her will and the nominated beneficiaries under the PP.

HMRC lost this case at the First-Tier Tribunal (FTT) and the Upper-Tier Tribunal (UTT).  However, they won at the Court of Appeal with all three judges unanimously deciding in their favour (although for different reasons).

Was there a transfer of value?

Both sides accepted that Mrs Staveley wanted the transfer to take place so her ex-husband couldn’t receive any of the money. However, it had to be decided if it was a transfer of value or not.

Section 3 of the Inheritance Tax Act 1984 determines that a “transfer of value is a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would have been but for the disposition”. Mrs Staveley’s estate was less after the transfer, and it was agreed that it was a transfer of value.

Was there intent?

Section 3 is also subject to section 10, which deals with dispositions which are not intended to confer gratuitous benefit. So did the transfer of value satisfy the section 10 test? It wasn’t just about whether Mrs Staveley did anything intentionally to improve her sons’ position, but also whether it was part of an “associated operation”. This means that when looking at the bigger picture, did it mean it was going to benefit her sons?

Mrs Staveley had the power to choose the beneficiaries before the transfer. After the transfer it was at the scheme administrator’s discretion.  However, the UTT stated that the FTT was entitled to find that the transfer wasn’t intended to confer gratuitous benefit on any person. The Court of Appeal disagreed.  They found that the failure to take pension benefits and the transfer itself were part of an associated operation to confer gratuitous benefit. It was accepted that the transfer was “not intended of itself to confer a gratuitous benefit (because Mrs Staveley wasn’t intending to improve her sons’ position by it)” but it was still an associated operation so section 10 didn’t apply.

There was another element to the case involving omission to act but this isn’t relevant now due to a change in the law.

What’s the impact for your clients?

Their beneficiaries may have an IHT bill if they die within 2 years and the transfer happened while they were in ill health.  The FTT made a comment that if a DC to DC transfer or switch took place for commercial reasons or there was no change in beneficiaries then it might not be a transfer of value. However, using the reasoning given by the Court of Appeal there would still be intent to confer a gratuitous benefit.

Preparing your client and their beneficiaries is crucial. A DB to DC transfer could mean there are death benefits to pass on, so the tax charge may be worth it. The same could be true for a DC to DC where it’s moving from an occupational scheme with limited death benefits to a fully flexible scheme.  However, moving from a fully flexible DC scheme to another fully flexible scheme for commercial reasons may not be wise if it comes with a tax bill. The suitability report must consider all the implications.

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