Recent Court case has inheritance tax (IHT) implications for pension transfers

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

In April 2015 the tax rules were changed to give people greater access to their pensions, and as a result many people have already transferred their pensions to benefit from more options at retirement and the enhanced death benefits that are now available. However as a result of a recent court case, delaying your decision to transfer could increase the risk of there being an inheritance charge if your health has begun to fail. This recent ruling by the Court of Appeal may make you want to act sooner rather than later. The case, which has become known as the ‘Staveley case’, has made an inheritance tax charge more likely for those who transfer while in ill-health and unfortunately die within two years.

So, what is the ‘Staveley Case’?

In 2006, Mrs Staveley had transferred her pension while knowingly in ill-health and unfortunately died two months later. HMRC argued that the transfer constituted a gift of death benefits to her sons, and inheritance tax was due, at least in part. Her executors argued that the main reason behind the transfer was to prevent her ex-husband benefiting from her pensions, and because the transfer was not done to benefit anyone else, there was no gift and therefore not subject to inheritance tax. Initially the sons succeeded with this argument at the First Tier Tribunal, and again after HMRC appealed at the Upper Tier Tribunal. However, in October this year, the decision was overturned by the Court of Appeal, who agreed with HMRC’s view that even though the main reason had been to prevent any pension money going back to the ex-husband, it was not accepted as the ‘sole motive’, and the transfer had indeed included a gift of death benefits to the two sons. Clearly the case was very complex, it took 12 years to get to this point, but it does however establish some principles going forward.

How does Staverley affect pension transfer decisions?

First of all pensions typically do not form part of the estate for inheritance tax, and this case does not have any implications on those who transfer their pension whilst in normal health. Although it may make you want to act now whilst in good health rather than putting off a decision. What the Staveley case does highlight though is that transferring whilst in ill health, and dying within 2 years of the transfer, is highly likely to result in an inheritance tax charge that would not have been the case had the pension remained in the original pension plan. Whilst It is important to be aware of the potential inheritance tax issue of transferring your pension whilst in ill health, it does not necessarily mean a transfer should not go ahead. It may still be beneficial despite there being an inheritance tax charge.

There are a number of factors you should consider, whether in good or poor health, when making the decision on whether a transfer is in your best interest or not. These include: checking to see if any valuable guaranteed benefits will be forgone; the options available to your beneficiaries on death; transfer penalties and other charges; investment options; the amount of tax free lump sum available, and income flexibility amongst other things.

Outside the home, your pension is often your largest asset. Wingate Financial Planning assists clients on a regular basis with pension transfer decisions. We undertake the necessary research and analysis to ensure our clients are informed when effecting any changes to their plans. If you are considering pension transfers, or should you wish to review your financial planning strategy, we are able to provide you with professional, fully independent and highly personalised advice.

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