The Supreme Court has given judgment on its first case determining the inheritance tax (IHT) treatment of pension transfers.
It's comforting that the Court has confirmed the general understanding of how such transfers should be treated for IHT purposes.
The case relates to Mrs Rachel Staveley, who died of cancer on 18 December 2006.
Shortly before her death, Mrs Staveley transferred her pension fund from a Section 32 buyout plan to a personal pension (PP).
The buyout plan derived from an occupational pension from a company she'd set up with her ex-husband, from whom she had acrimoniously divorced.
If her pension had remained in the buyout plan then, on her death, a lump sum would have been payable to her estate and chargeable to IHT.
Mrs Staveley’s two sons were nominated as her beneficiaries in respect of the PP death benefit.
Under the PP's terms, the death benefit would be payable at the discretion of the scheme administrators, would not form part of her estate, and would thus not be subject to IHT.
She did not take any benefits from the PP (nor indeed from the buyout plan) during her lifetime.
HM Revenue & Customs (HMRC) determined that IHT was due.
This was on the basis that both the transfer of funds into the PP, and Mrs Staveley’s omission to draw any benefits from it before her death, were lifetime transfers of value.
The transfer to the PP
Mrs Staveley’s executors argued that the transfer to the PP was exempt from IHT because it was a "disposition which was not made with the intention of conferring a gratuitous benefit on any person."
A disposition in this context includes all forms of disposals and transfers of assets.
It is a fundamental principle of IHT that a disposition/transfer is only taxable if there is an intent to benefit another.
The First-tier Tribunal found that Mrs Staveley’s sole motive for the transfer was to avoid any part of her pension fund reverting to the company, and thus to her former husband.
(She'd been incorrectly advised that in certain circumstances the value of her buyout plan could revert to her ex-husband’s company.)
It's important to appreciate that the First-tier Tribunal determines the facts, and its determination can only be overturned if it has reached a conclusion "without any evidence or upon a view of the facts which could not reasonably be entertained."
The Tribunal had found as a fact that the sole motive for the transfer was to prevent her ex-husband benefiting from her pension.
That being so, it couldn't be said that she had the intention of conferring a gratuitous benefit on any person.
HMRC was unable to convince the Supreme Court that there were other motives for the transfer. So the Supreme Court, by a majority, concluded there was no IHT charge on the transfer.
The omission to draw benefits from the PP
The Supreme Court held that it was
"common ground that Mrs Staveley’s estate was diminished by her omission to exercise her right to lifetime benefits under her pension and that her sons received the resulting death benefits some months after her death.
"The dispute is as to whether it can be said that 'the value … of another person’s estate … is increased by' her omission."
The Supreme Court decided
"... section 3(3) requires only that 'another person’s estate' is increased. It is not concerned with the identity of the other person.
"The benefits that were generated by Mrs Staveley’s omission to draw her lifetime pension were undoubtedly going to increase 'another person’s estate', even if the scheme administrator had not exercised its discretion in favour of the sons, but instead chosen others from the list within the scheme rules."
Of course, this is now all academic.
For deaths on and after 6 April 2011, where a member of a registered pension scheme omits to exercise a right to take available pension benefits from that pension scheme, the ‘omission’ is not regarded as a transfer for IHT purposes.
What does this mean for advisers?
Transfers between pension schemes have IHT implications.
But, and it is a very important ‘but’, 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, it is effectively ignored.
Only defined benefit to defined contribution (DC) transfers will cause a potential problem. Transfers from one DC scheme to another will involve only a nominal transfer of value.
Those advising on transfers should be aware of the possibility of an IHT charge but should be reassured that the occurrence of such a charge will be rare.
In those cases which are challenged, it should be noted that HMRC will fight to establish, as a 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 a one-off.