Risks of Ill-Health Pension Transfers Fall With Landmark Ruling

The Supreme Court has denied HMRC the right to charge inheritance tax on a pension which was transferred out of an occupational pension scheme just weeks before the holder's death.

In a landmark case, the court ruled yesterday that HMRC was wrong to try and bill the sons of a woman who moved her pension to a private savings pot while she was gravely ill.

The case could set a new precedent for pension savers, who are frequently advised against transferring final salary pensions to personal pension plans, in case it attracts the attention of the taxman; potentially landing their beneficiaries with a hefty 40% inheritance tax bill, if they should die within two years of making the transfer.

The ruling was based on the case of Ms Staveley, who died of cancer in 2006.

Since her death, the case has worked its way up through the courts, with judgements changing at every turn. However, The Supreme Court decision is final.

Ms Staveley Had Founded and Run a Company

Years before her death, Ms Staveley had founded and run a company with her then-husband, into which she paid a generous pension contribution.

After an 'acrimonious' divorce and cancer diagnosis, she moved her work pension into a private plan, in order to avoid any overpayments on her pension being returned to the company, and her ex-husband, upon her death.

She bequeathed the new pension to her two sons and died a few weeks after making the transfer.

Mrs Staveley's sole intention on transferring her pension funds to the PPP [personal pension plan] was to cut out any possibility of risk that any part of the pension fund might be returned to [her ex-husband].

said Mr Richard Parry, the legal representative who executed Ms Staveley's Will

HMRC argued that the pension transfer was designed to reduce the value of her estate for tax purposes and deliver a "gratuitous benefit" to her sons.

After years of uncertainty about whether or not a precedent would be set, the ruling may finally usher in greater tax leniency for people in ill-health wanting to make the most of their pension savings.

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.

said a senior analyst at AJ Bell, Tom Selby in May

Yet while the scene appears to be set for an overhaul of IHT rules around pensions, industry experts Lane, Clark & Peacock urged savers to be cautious until the Revenue clarifies their rules:

We look forward to HMRC publishing revised guidance, hopefully in the near future, that will clarify that the act of transferring by itself should not expose the individual to an inheritance tax charge. But at least until then those transferring who might be drawn into the net will need to tread carefully

An HMRC spokesperson told the Financial Times that the department was still considering the implications of the Supreme Court's decision