A complex, long-running legal case about inheritance tax (IHT) liabilities when a pension transfer or switch is made in terminal health has been settled – and has underlined the importance of financial advice.
The Commissioners for Her Majesty’s Revenue and Customs v Parry & Ors – otherwise known as the “Staveley case” – was first heard in 2014.
It involved a difficult divorce, where the wife transferred part of a pension she had set up with her husband into a new pot and bequeathed it to her children. She died just weeks later.
As 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.
It argued the two actions were linked and designed to reduce the value of her estate for IHT purposes.
The case has since been through the Upper Tribunal and Court of Appeal before being referred to the Supreme Court.
Now, by a majority, the Supreme Court partially allowed the appeal, holding that the omission gave rise to a charge to inheritance tax, but the transfer did not.
Clare Moffat, head of intermediary development and technical at Royal London, said the decision has clarified that “intention is crucial” when a pension transfer or switch is made in terminal ill health.
She said: “Where there is an intention to give benefits which didn’t exist before, such as a DB to DC transfer, it will be subject to IHT. But a discretionary DC to DC switch may be completed without worry of IHT if it is for genuine commercial reasons and the beneficiaries on the expression of wish form stay the same.”
Moffat said the case underlined the important role that financial advisers play when it comes to pensions, IHT and death benefits.
She said: “As always, financial advice is key.”