Retirement savers who transfer a pension for health reasons should not be charged inheritance tax, has reached the Supreme Court.
The judges will rule if someone suffering from terminal illness needs to make their intentions clear when switching funds between defined contribution (DC) pensions, like SIPPs and QROPS.
The case – HMRC v Parry and others – has lasted years, with the retirement saver Rachel Parry dying of cancer in 2006.
Before she died, Ms Staveley switched the pension fund between a company DC pension to a personal DC pension.
Ms Staveley drew no money from the fund, which was left to her two sons, who were also the beneficiaries before the transfer.
The result was the fund was removed from her estate for IHT purposes.
Family fights HMRC
HMRC argued the transfer was made to stop any of the fund reverting to the company DC pension, which would lead to her former husband gaining a financial advantage.
The family countered that the transfer gave no benefit to the sons that was not there prior to the switch.
The First Tier Tax Tribunal and Upper Tribunal both ruled that as Ms Staveley took no money from the fund, the move was a transfer of value, a decision that was reversed by a second Upper Tribunal hearing.
HMRC took the case to the Court of Appeal which backed the appeal but allowed the case to go to the Supreme Court.
What the case means
“The Supreme Court decision in the Staveley case has clarified that intention is crucial when a pension transfer or switch is made in terminal ill health,” said Clare Moffat, head of intermediary development and technical at Royal London.
“Where there is an intention to give benefits which didn’t exist before, such as a DB to DC transfer, it will be subject to IHT. But a discretionary DC to DC switch may be completed without worry of IHT if it is for genuine commercial reasons and the beneficiaries on the expression of wish form stay the same. As always, financial advice is key.”
The Supreme Court is yet to set a date for the final hearing.
“Thirteen years after Mrs Staveley died and five years since the case first went in front of a Judge, savers are now finally on the cusp of some clarity on the tax treatment of ill-health pension transfers. Whether that clarity will be positive or negative remains to be seen, however,” said Tom Selby, a senior analyst at pension platform AJ Bell.
Lack of understanding of IHT rules
“If the Court of Appeal ruling from 2018 is upheld then DC pension transfers risk being hit with a tax charge where the member dies within two years even where the primary motivation was to change provider or lower annual charges.
“This protracted case has exposed the complexity and confusion that exists around pensions and IHT. Recently published research on behalf of the government exposed a gaping lack of understanding when it comes to gifting and IHT, and this is even more pronounced when pensions are thrown into the mix.
“It is within the gift of politicians to address this confusion. Regardless of the Supreme Court ruling, the common-sense solution to this complexity would be to remove pensions from IHT altogether.”
Read the Court of Appeal judgment
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