Pension transfers and inheritance tax

In a contentious and precedent-setting case, the Supreme Court recently ruled that a pension transfer made in ill health was not liable for Inheritance Tax (IHT). Laura Atkins, our Associate Financial Planning Director in Leeds, explains what this means for future ill health transfers.

According to the current government rules, pensions are not usually subject to IHT, meaning that pension wealth can be passed on to a loved one free from tax, provided that the scheme has discretion over the payment of death benefits.

However, IHT is payable on certain ‘transfers of value’ made in an individual’s lifetime. So, all pension transfers made in the two years prior to death must be reported to HMRC and clients in poor health could be subject to IHT if they contribute to or transfer their pension and die within two years.

The HMRC v Staveley case was centred on whether IHT was due on pension transfer carried out by Mrs Staveley while in ill health, shortly before her death.

In 2014, after a difficult divorce, Mrs Staveley transferred part of an occupational pension she had set up with her husband into a new pot and bequeathed it to her children. She died just weeks later.

Because she was terminally ill, HMRC treated the transfer as a ‘transfer of value’ followed by an ‘omission to act’, as she did not draw any benefits, and applied IHT.

Following the final ruling of the Supreme Court, the outcome was that IHT was not payable on Mrs Staveley’s pension wealth, on the basis that this transfer was not intended to improve her sons’ financial position and that her sole intention was to stop funds going back to her ex-husband.

The Supreme Court's decision, therefore, clarified that intention is crucial when a pension transfer or switch is made in terminal ill health.

Intent is the key to this case. If it can be demonstrated that the motivation for transferring your pension is not about improving death benefits for someone else, then the transfer can be made with more confidence.

The guidance however from HMRC in this area is still not particularly clear at the present time. Following the ruling in this case, we are expecting to see HMRC re-evaluating its current policies in relation to the IHT position of ill health pension transfers.

Transfers made while in normal health will not usually give rise to an IHT charge and it is therefore far better to get pension affairs in order whilst you are in good health.

If you’d like any assistance with getting your pension affairs in order, please feel free to get in touch.

To contact or read more about Laura Atkins visit her biography here.