Earlier this week, HMRC lost an appeal against the estate of a deceased cancer sufferer Rachel Staveley who, in 2006, transferred her section 32 policy into a personal pension despite being aware that she was terminally ill. She died just months after the transfer.
At present, pension benefits are not subject to IHT. However, if a client dies within two years of a pension transfer where the individual knew that he or she was in serious ill-health when the transfer was made, then this could be subject to a hefty IHT bill.
An exception arises when the pension transfer in question was not supposed to offer a benefit to anyone else, therefore it would not be considered a ‘transfer of value’.
Staveley case
British citizen Staveley, who was diagnosed with cancer in 2004, had set up a company, called Morayford Limited with her husband, which established an approved occupational pension scheme, with Staveley becoming a member of that scheme.
In 2000, she went through an ‘acrimonious’ divorce with her husband and transferred her occupational pension scheme into a Section 32 policy, which is a deferred annuity.
In 2006, having been advised that her section 32 policy was overfunded, meaning the surplus could be returned to her ex-husband’s company, Staveley then transferred the policy to a personal pension despite being aware that she was terminally ill.
She died later that year, meaning she was within two years of the transfer and before she had taken any benefits.
The scheme administrator of the personal pension used its discretion to pay her death benefits, split equally between her two sons.
No IHT motivation
As Staveley was terminally ill, HMRC treated the transfer as a “chargeable lifetime transfer” and applied inheritance tax.
The tax office argued that Staveley made the transfer because she wanted the money to go to her sons so it could be exempt from IHT, therefore it counted as ‘transfer of value’ for IHT purposes.
Her sons challenged HMRC and won. HMRC appealed and lost.
The Tribunal rejected HMRC’s findings, arguing that Staveley made the transfer to stop her ex-husband getting any money. In addition, her two sons were already beneficiaries under will.
The court ruled that any IHT advantage gained from the transfer was “not intended to confer gratuitous benefit”, and therefore rejected HMRC’s appeal.
Not a precedent
Old Mutual’s Griffin said it’s unlikely the ruling will set a precedent against future IHT cases, despite some tax experts such as AJ Bell’s head of platform technical, Mike Morrison, arguing that it may change the current rules.
“The individual circumstances of this case, where part of the reason for Mrs Staveley’s action was to prevent any death benefit going in to her ex-husband’s hands on her death, should not be taken as setting a precedent for any future pension transfer cases,” Griffin told International Adviser.
“For any client who knows that their life expectancy is impaired, an adviser should continue to undertake a full appraisal of the client’s situation, including explaining the possibility that some, or all, of the transferred amount could be included within the client’s estate for IHT purposes, if the client transfers and dies within two years of the transfer.”
