Shock Family Tax Bills For Ill Expats Gifting Unspent Pensions

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Families of expats trapped in the UK’s wealth tax net could face a shock bill following a controversial court case.

The Court of Appeal sided with arguments made by HM Revenue & Customs, ruling that pensions transferred out of the estates of retirement savers in ill health are subject to inheritance tax if they die within two years of the switch.

This could mean unspent pension pots otherwise considered outside of the reach of IHT could be taxed at 40% if the value of the estate breaks the zero band limits.

The ruling applies to all defined benefit and defined contribution pensions – but at this stage the tax treatment of Qualifying Recognised Overseas Pension schemes (QROPS) is unclear even though they are considered as defined contribution pensions.

The ruling came in the case of HMRC v Staveley, a divorcee who was terminally ill.

No evidence

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She transferred a pension award from the divorce to a new fund which she left to her children.

Unfortunately, she died with weeks of the switch.

HMRC argued the transfer was made to cap the IHT due on the estate. The Court of Appeal agreed, explaining the estate had offered no evidence to show the transfer was made without the intention of avoiding IHT.

“There was no doubt a deliberate placing of the onus on the donor in these circumstances because there will be many cases where the relevant evidence about what the donor intended is not in HMRC’s hands, and so difficulties in recovering IHT and the scope for possible abuse are obvious,” said the ruling.

Bizarre and confusing

“Parliament would, moreover, surely not have intended liability to IHT to depend on whether a prior gift had been made, which may have been, as in this case, of no value when made, and revoked, and then remade, potentially, as in this case, in a much more advantageous form, at a time when it is of considerably greater value.”

Tom Selby, a senior analyst at pension provider AJ Bell, said: “This ruling at best causes major confusion for pension savers in ill-health and at worst risks landing their beneficiaries with a shock 40% tax bill on the money left behind by a loved one.

“It is frankly bizarre that someone who transfers from one defined contribution plan to another now risks being hit with a 40% IHT bill – even if the transfer doesn’t materially change the money that will be passed on if they die within two years.”

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