Advisers breathed a collective sigh of relief following the Supreme Court’s decision in the Staveley case, around IHT on transfers made by clients in ill-health. Here Neil MacGillivray reflects on the ground-breaking judgement, which echoed a case he’d tried to help an adviser with several years ago …
It wasn’t quite as contentious as “Staveley“, but was still based on HM Revenue & Custom’s (HMRC) opinion that there can be inheritance tax (IHT) consequences where a person in ill-health transfers from one pension scheme to another, and these can have serious implications.
The adviser was asked by a friend, who was terminally ill, to help him put his affairs in order. As part of the review, the adviser recommended that his friend, and now client, should transfer his three personal pension schemes into one arrangement. The reason was simply to reduce the administrative burden on his death. His spouse was nominated as beneficiary in both the ceding and new schemes.
Regrettably, the client died shortly after the transfers, and sometime later the client’s solicitor contacted the adviser and informed him that HMRC had decided to treat the pension transfers as chargeable lifetime transfers.
When the adviser contacted me, he was mystified as to why there was an IHT issue.
Surely death benefits were free of IHT and there had been no IHT advantage generated by the transactions? Unfortunately, at the time there was no good news to tell.
It was HMRC’s opinion that when a member transferred from one pension scheme to another, the member surrendered their rights under the original scheme in return for their rights in the new one. The implication of this was that the member ended any trusts that applied to their death benefits in the original pension schemes.
As a member can control which new pension provider to use, they can determine what new trust the death benefits are subject to. In theory, the member could, under the new pension arrangement, direct the death benefits to their own estate.
However, in all likelihood the new arrangement will exclude the member’s estate as a beneficiary, and as such, there’s a potential loss to the member’s estate. On this basis, HMRC considered the transfer of the pension rights as a transfer of value.
This view was tempered somewhat if the member was in good health at the time of the transfer; it was deemed that the rights to the death benefits were of negligible value, as it was assumed the member would live to take their pension.
However, if the member was knowingly in ill-health at the time of the transfer, and died within two years of doing so, the rights to the death benefits had a significant value and would be treated as a chargeable transfer.
HMRC’s stance was viewed as particularly harsh when transfers had been made in good faith, as, for example, to gain access to pension freedoms, or a more competitively priced product or, as in this case, just to simplify matters. The idea that such benign actions could generate an IHT charge has always seemed unjust when, before and after the transfer, the death benefits are still held in a discretionary trust and no physical IHT benefit created.
The Supreme Court fortunately found that HMRC’s stance, that a benefit falls into the members estate between transferring from one pension scheme to another as beneficial, is wrong.
More attention should’ve been paid to the practical reality of the legal situation rather than HMRC’s “wholly artificial analysis”. When considering whether the pension transfer confers a benefit, you should compare the position after transfer with the position before transfer, and ask the question has anything actually changed?
So, a transfer from one defined contribution scheme to another should no longer be treated as a transfer of value, provided there was no intention to confer any gratuitous benefit and therefore no IHT advantage in transferring between schemes. This is further underpinned if there’s no change to the nominated beneficiaries.
Therefore, transferring to obtain better terms, or access to wider funds, or just to simplify matters should now face no challenge from HMRC.
For many observers, this result is long overdue. Countless individuals have, over the years, been unfairly penalised when they transferred pension arrangements, based simply on the fact they were knowingly in ill-health at the time of the transfer, and nothing to do with whether, or not, tax planning was the primary factor for their action.
At last common sense prevails.
Neil MacGillivray is head of technical support at James Hay