Staveley case goes to Supreme Court – ill-health pension transfers
We have previously looked at the issues around making a pension transfer or switch when in ill health and the potential for HMRC to allocate a ‘transfer of value’ figure for inheritance tax purposes should the member die within the following 2 years.
The fact that HMRC can apply a value for inheritance tax (IHT) purposes to an asset that isn’t generally subject to IHT has become more and more topical with the advent of pension freedoms and people perhaps moving pension benefits to achieve improved death benefits and added flexibility.
A pension transfer (of any type) that took place in the 2 years before the death of the member must be declared to HMRC if the member was knowingly in ill-health at the time of the transfer (any transfers outside of this 2 year period are safe from scrutiny).
Transfers and certain other actions - substantially increasing contributions or assigning death benefits into trust - within two years of death and when in ill-health, are the areas that HMRC look at. Details must be provided on form IHT409, which is supplementary to the main IHT400 form. HMRC will then decide whether or not there has been a deemed loss to the estate and, if there has, what figure to allocate as the ‘transfer of value’ for IHT purposes.
HMRC don’t provide much in the way of guidance but they are said to have confirmed that with regard to a money purchase transfer where the member is aged 55 or over, if the new plan allows flexi-access drawdown, the deemed transfer of value is roughly based on the transfer value less the tax free cash entitlement and less the drawdown fund after tax, with the resulting figure being the deemed loss to the estate. The calculations would include assumptions for charges, discount rates, interest rates, growth rates and so on making the reality much more complex than described here.
A case relevant to this issue, HMRC v Parry (2018) BT 38 (often referred to as the Staveley case), relates to Mrs Staveley who, when in serious ill health, transferred her section 32 plan into a PPP to avoid her ex-husband having any entitlement on her death. She died shortly afterwards.
In the first part of the story, HMRC’s view was that Mrs Staveley had made a chargeable transfer (transfer of value for IHT purposes) when she made the pension transfer. Mrs Staveley’s estate appealed against this decision on the basis that there should be no IHT transfer of value because the sole reason for the transfer was to prevent her husband benefiting from the death benefits under the pension plan. There was no intention to confer any gratuitous benefit and so the exemption in section 10 IHT Act 1984 applied.
The First-tier tribunal and then the Upper tribunal disagreed with HMRC that a transfer of value had taken place so HMRC then took the case to the Court of Appeal last year where the Court decided a transfer of value had taken place.
It has now been announced that leave to appeal has been granted to the estate and so the case is going to be heard in the Supreme Court.
We await the outcome of this latest chapter of the case with interest and, should HMRC lose, whether this results in any changes to the current position.