The way inheritance tax is applied to the transfer of pensions could change following the Court of Appeal’s decision to find in favour of a landmark case brought to them by HM Revenues and Customs (HMRC).
The ruling will mean that savers suffering from severe ill health who then transfer their pensions between schemes could be subject to inheritance tax.
Elderly savers have benefited from the 1984 Inheritance Tax Act which allows a bequeathed pension exemption from inheritance tax as long as there is no ‘gratuitous benefit.’
The recent victory from the HMRC against the now deceased Mrs RF Staveley means that anyone who transfers their pension to their children or any other beneficiary and dies within two years of the action will be subject to 40% inheritance tax.
The original case goes back to 2005-2006 and concerns an acrimonious divorce. Following the creation of a joint successful business, Mrs Staveley divorced her husband and was granted a pension in the form of a section 32 buyout policy.
In October 2006 and subsequently within a two month period of her death, Mrs Staveley transferred the pension organised by her ex husband to a personal pension of her own, naming her two children as joint beneficiaries. Remaining in the old section 32 pension would have meant the lump sum of the policy would be liable to inheritance tax and could have been paid to her ex-husband as he set up the policy.
Additionally, under the clause of the fund, and as her pension was crystallised, the sons would receive the death benefit free of inheritance tax.
HMRC challenged the decision and applied inheritance tax to the pension as it claimed that the transfer was a chargeable lifetime transfer as it intentionally reduced the inheritance tax that would be paid.
In 2017 the First Tier Tribunal rejected the HMRC’s case, the decision was upheld again by the Upper Tier Tribunal. However, The Court of Appeal have unanimously agreed with the claim that the pension and money accrued from the pension is liable to inheritance tax.
Tom Selby, senior analyst at AJ Bell, said: “at best the ruling causes major confusion for pension savers in ill-health and at worst risks landing their beneficiaries with a shock 40 per cent tax bill on the money left behind by a loved one.
“It is frankly bizarre that someone who transfers from one DC plan to another now risks being hit with a 40 per cent IHT bill – even if the transfer doesn’t materially change the money that will be passed on if they die within two years.
“This is already something defined benefit members in ill-health can fall foul of, although whether or not this is the case depends on the interpretation of their intentions at the time.
“What we are left with is a complex, nonsensical web of rules which risk layering on extra worry for beneficiaries at a time where they are likely to be suffering from serious emotional distress.
“Instead of allowing court rulings to determine whether IHT is due on retirement funds left behind, the Government could radically simplify the system by exempting pensions from IHT altogether.”
Whilst many will hope that the majority of pension transfers will remain exempt if there is no financial benefit, it will also concern many people that will see this as the HMRC’s way of improving their considerable and expanding coffers.
Half one data for 2018 has already seen HMRC gather a record £2.8 billion in tax receipts. If this trend continues, then 2018 tax will top £5.6 billion, £200 million more than in 2017.
Should more be done to protect pensions from inheritance tax? Do you know families that have been affected by this? What can be done to help?
