In a recent case, the Supreme Court held that HMRC was not entitled to charge inheritance tax (IHT) on a pension transfer made in ill health. Following her divorce, Ms Staveley transferred a portion of her pension that was set up with her ex-husband into a new personal pension plan and bequeathed it to her children. As Ms Staveley was terminally ill, HMRC charged IHT treating it as a chargeable lifetime transfer and an "omission to act" as Ms Staveley did not draw any benefits. HMRC argued that the action was intended to reduce the value of Ms Staveley's estate for IHT purposes.
The Supreme Court found that Ms Staveley's intention had not been part of a plan to reduce the value of her estate for the purposes of IHT as she could have left her children the death benefits without making a transfer. The motivation for the transfer was to avoid any pension funds reverting back to the business Ms Staveley had founded with her ex-husband.
HMRC has released a statement, however, effectively calling this a win for them as the court ruled that tax could be charged on the "omission to act" as Ms Staveley did not draw benefits following the transfer. The omission increased the inheritance of her two sons and although not her motivation, this was the result however the two could not be linked for IHT purposes according to the court.
Personal tax planning
This judgement brings some clarity for those in ill-health looking to make changes to their pension pot and this case will perhaps set a precedent. Currently, if someone transfers their pension pot and dies within two years it can attract an IHT charge. The case highlights that the motivations for making changes to the pension is key when determining if an IHT charge is applicable. Despite the progress this case brings, the application of IHT in connection with pensions remains a complex area.
More information on the judgement can be found here.
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