UK: Pension Transfer Not Exempt From Inheritance Tax

Last Updated: 28 November 2018
Article by Paul Hodges, Mark Howard, Terry Saeedi and Matthew Ambler

Most Read Contributor in UK, November 2018

In the case of HMRC v Parry (16 October 2018), the Court of Appeal found that a transfer from one pension policy to a personal pension policy, with a statement of wishes identifying particular beneficiaries, was a transfer of value for Inheritance Tax purposes. As it did not fall within any exemption, it was subject to Inheritance Tax.

The case involved a Mrs Staveley, who had built up a company, Morayford Limited, with her husband. As part of an acrimonious divorce, Morayford Limited granted her a pension in the form of a s32 buyout policy. The s32 policy had a surplus which could potentially pass back to her former husband. Therefore in October 2006, 6 weeks before her death, Mrs Staveley transferred her pension to a newly set up personal pension policy and completed an expression of wish form in favour of her sons. She died a few weeks later.

HMRC treated the transfer between the pension policies as a "chargeable lifetime transfer" followed by an "omission to act" because Mrs Staveley was terminally ill when she made the transfer and "omitted" to take any benefits from the personal pension policy. HMRC's view was that the two actions were linked and were intended to reduce the value of her estate for Inheritance Tax (IHT) purposes and her sons' estates were augmented as a result. They therefore sought to impose IHT on the transfer.

Mrs Staveley's estate argued that the transfer was not meant to "confer a gratuitous benefit" and so was exempt from IHT under a particular exemption in the IHT legislation.

The Court of Appeal found in favour of HMRC, overturning the decisions in lower courts which found for Mrs Staveley. Although the three judges differed in some of their reasoning they all came to the same decision to allow HMRC's appeal.

The Court decided that the transfer of the policy and Mrs Staveley's omission to take the pension benefits from the personal pension were associated operations intended to confer a gratuitous benefit. Although the transfer to the new pension was not of itself intended to confer such a benefit, this did not prevent it being part of such an operation which achieved this. It was enough that it formed part of and contributed to such a scheme which did confer the gratuitous benefit. Lord Justice Newey thought "while...Mrs Staveley did not see the transfer to the [personal pension policy] as improving her sons' position and she made the transfer to the [personal pension policy] out of a desire to sever her ties to Morayford [Limited], the only reasonably conclusion, as it seems to me, is that she also intended the [personal pension policy] to be a means by which the death benefits could be passed to her sons".

All three judges found that there was an increase in her sons' estates as a result of the omission to take benefits which would give rise to an IHT charge. Lord Justice Newey thought "the sons' estates are, I think, fairly to be regarded as having been increased "by" the omission of their mother to take benefits before she died. The sons' estates would not, of course, have been so increased but for the omission".

The judges also rejected the sons' argument that the omission was not sufficiently connected with their receipt of benefits because under the personal pension policy, the scheme administrator had to exercise its discretion in their favour – they had argued that it was not certain that the administrator would have followed Mrs Staveley's expression of wish form.

Lord Justice Newey thought "the administrator was, after all, doing no more than it was obliged and could be expected to do in the period immediately following Mrs Staveley's death". Lady Arden thought that generally whether there was an increase in beneficiaries' estates as a result of an omission to take benefits would depend on an assessment of the relevant facts in particular cases. Here she thought the casual link remained as the nomination in favour of the sons was "relatively straightforward" and so the fund was likely to be paid over for them. In other cases, it may be different – for example "where the nomination was made a long time before death or where events have occurred which would lead the administrator to consider that the wishes of the deceased should not be followed". In such cases, she thought a court could come to a different conclusion and attach more weight to the administrator's discretion.

Clyde & Co comment

The case has caused a bit of stir as it raises the possibility that pension members who are terminally ill face an IHT tax charge if they transfer their pension, to seek to take advantange of death benefits, and die within 2 years. It is also unclear what HMRC's position would be if someone was completely unaware they had a terminal illness.

It does seem harsh to penalise people in terminal illness in this way especially where the amount of money transferred between the two plans does not change and the money remained within the "pensions wrapper" at all times (an argument put by the sons' barrister though rejected by the Court of Appeal).

At the start of year, the Chancellor requested the independent Office of Tax Simplification to carry out a review into Inheritance Tax generally, and how it functions today, to identify simplification opportunities. The OTS published the first part of their review on 23 November 2018 but this dealt primarily with simplification issues. The second part of the review is due in Spring 2019 and will look into other aspects of the IHT regime including the administration of life insurance and pension products and the taxation of trusts. It is possible that the issue in this case could come within the scope of the OTS's review.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Mark Howard
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions