Over recent years an increasing number of families have been stung by inheritance tax liabilities for which they were unprepared.
The tax liability surprise affects mainly those estates which stand to benefit from transferred pensions schemes when the testator has made the transfer knowing that he or she has reduced life expectancy or has died within two years of making the transfer.
For those falling foul of the HM Revenue and Customs rules there is only limited clarity regarding options when faced with such unexpected liability – indeed, it is a grey area of the law unfamiliar even to many of the UK's probate solicitors.
Fortunately, however, a recent case heard in the Upper Tribunal (Tax and Chancery Chamber) may help shed light on the issue. Below we take a look at the case before considering its impact.
HMRC tribunal case
The case helps provide some clarification on the interpretation of the two-year rule on Inheritance Tax (IHT).
Although pension benefits transfers are not typically subject to Inheritance Tax, they are in the event that the client knows he or she is in a state of precarious health and subsequently dies within two years of the pension transfer.
The case, Revenue And Customs v Representatives of Staveley (deceased)  UKUT 4 (TCC) (10 January 2017), concerned a woman called Rachel Staveley who went through an acrimonious divorce with her husband (who was, importantly, her employer) and subsequently transferred her workplace pension scheme into a Section 32 deferred annuity.
However, in 2006, two years after being diagnosed with cancer and mindful that she didn't wish her ex-husband to benefit in any way from her overfunded Section 32 pension scheme she made a second transfer, this time into a personal pension. Several weeks later she died.
HMRC challenged the woman's actions, arguing that it was a "transfer of value" because the woman was fully aware of the implications of the transfer and that she had wished to pass on the full value of the pension to her sons, undiminished by any inheritance tax deductions, and as such treated it as a "chargeable lifetime transfer" followed by an "omission to act". Therefore, said the organisation, the pension was liable for Inheritance Tax.
However, in hearing the case, the tribunal rejected HMRC's claims, countering that the testator had made the transfer only to prevent her ex-husband from deriving financial benefit from her Section 32 pension.
The Staveley case shows probate solicitors that they may be able to help clients who wish to legally avoid tax from pension transfers outside of the usual two-year time limit if they can prove that the transfer has not been undertaken with the intention of avoiding Inheritance Tax. The Key element in this case is that the Court has ruled no IHT was due because there was no intention by Mrs Staveley to avoid IHT.
However, the ruling was made at the end of January 2017 and there is still a possibility that HMRC might appeal the case to The Court of Appeal.
Furthermore, it is important to consider that the circumstances of the case are very particular, and as such there is unlikely to be any need to amend the Inheritance Tax Act 1984 – it would be unwise to read too much precedent into the case, however given the complex nature of this particular area we may see further test cases such as this in the future.
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