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Paraplanning: what the Staveley case means for inheritance tax and pensions

23 October, 2020Gerry Brown

In August 2020, the Supreme Court gave judgment on the Staveley case – its first case involving the inheritance tax (IHT) treatment of pension transfers. Gerry Brown is a consultant with QB Partners and a contributor to our Diploma in Paraplanning. He looks at the Staveley case and sets out what paraplanners need to learn from it.

Judge's gavelShortly before her death in December 2006, Mrs Rachel Staveley transferred pension benefits from one pension arrangement – a ‘section 32 buy-out’ plan (s32) –to a personal pension.

She then decided not to take any lifetime benefits. She was in serious ill health at the time and by not taking lifetime benefits, enhanced the value of the death benefits which were later paid to her sons.

HM Revenue & Customs (HMRC) determined that both the transfer to the personal pension and the failure to take lifetime benefits triggered IHT charges.

Mrs Staveley’s executors appealed and the matter was referred to the Tax Tribunal. The Tribunal’s decision was appealed to higher courts, finally ending up in the Supreme Court.

This confirmed tax practitioners’ general understanding of the IHT treatment of such transfers.

The transfer from the s32 to the personal pension was potentially subject to IHT

However, Mrs Staveley’s executors were able to show that – when making the transfer – she had no intention of benefiting her sons.

For a transfer to be subject to IHT, there must be an intention to benefit the recipient.

So, if I sell jewellery worth £20,000 for £1,000 in ignorance of its true value, there’s no charge to IHT. My estate has fallen in value by £19,000 but I didn’t intend to benefit the purchaser.

Mrs Staveley’s decision not to take lifetime benefits did trigger an IHT charge and HMRC did win on this point.

However, the law has been changed since 2006 so today no IHT charge would arise on such a failure involving pension benefits.

Transfers between pension schemes have IHT implications

HMRC’s stated practice is:

“If a person is in normal health at the date of the transfer then the loss to the estate is nominal. If they are in ill health at the date of the transfer then the loss may be significant. Details of any transfers made within the two years before the death should be reported on the IHT409.”

So, if the member survives two years from the transfer, no IHT is charged.

What paraplanners need to know

If you’re advising on transfers you should know that transfers between pension schemes are potentially subject to IHT. But the occurrence of a charge will be rare.

If the member survives the transfer by two years, HMRC will not seek to levy a charge.

If HMRC do challenge a case, they’ll try to establish as fact that the deceased did intend to benefit ‘another’ – usually a family member.

The defence available to Mrs Staveley’s executors may turn out to be very rare. But if it can be shown that there was no intention to confer a benefit, that’s a defence.

Only transfers from ‘defined benefit’ to ‘defined contribution’ pensions will cause a potential problem.

Where the transfer is from one defined contribution scheme to another, you can usually demonstrate it’s to benefit from lower charges and/or better investment options.

Omissions to draw lifetime pension benefits – with the intention of passing wealth IHT-free to succeeding generations through death benefits – will not trigger an IHT charge.

Gerry Brown
Gerry Brown began his professional career as an inspector of taxes and later qualified as a chartered accountant. He’s worked at a number of financial services companies providing technical support and contributes to our Diploma in Paraplanning (DipPP).

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