Pension transfers aren’t exempt from inheritance tax
Updated: Feb 13, 2019
I previously covered the recent developments in inheritance tax fines and how some 5,400 estates were being investigated by the tax office for underpayment of IHT last year.
It was an issue that caused a lot of concern among UK estate owners, primarily because the rise in investigations by HMRC meant beneficiaries who weren’t cash-rich could face hefty fines.
Now, it seems that pension transfers aren’t exempt from inheritance tax either. In the case of HMRC v Parry (16 October 2018), a scenario was brought forward to the Court of Appeal, revealing that a transfer from one pension policy to a personal pension policy (with a statement of wishes identifying particular beneficiaries) was a transfer of value for Inheritance Tax purposes. Since the action did not fall within any exemption, it was subject to Inheritance Tax.
Let’s have a closer look at this particular case. It involved a woman who had built up her company along with her husband. Eventually, a divorce had proceeded among the two individuals which led to the company granting her a pension in the form of an s32 buyout policy.
This policy had a surplus (which meant that it could potentially be shifted back to her former husband). In light of this, in October 2006, 6 weeks before her death, she decided to transfer her pension to a newly set up personal pension policy. She completed an expression of wish form in favour of her sons before passing away just a few weeks later.
The ball was now in the court of HMRC, which evaluated the process and deemed the transfer between the pension policies a “chargeable lifetime transfer” followed by an “omission to act” since the woman was terminally ill during her transfer and “omitted” to take any benefits from the personal pension policy.
From the perspective of HMRC, these two actions were directly linked to each other, with an intention to reduce the value of the woman’s real estate for Inheritance Tax (IHT) purposes which prompted the augmentation of her sons’ estates as a result. In conclusion, HMRC sought to impose IHT on the transfer.
The woman’s estate made an argument to attempt to counter HMRC’s decision, stating that the transfer was in fact not meant to “confer a gratuitous benefit” and thus should be exempt from IHT under a specific exemption within the IHT legislation. Despite this, the Court of Appeal found in favour of HMRC, overturning decisions in lower courts which found for the woman’s estate. All three judges may have differed in some of their reasoning for the decision but ultimately, all came to the same decision to allow HMRC’s appeal.
In addition, the sons’ made an argument about the omission not being sufficiently connected with their receipt of benefits since under the personal pension policy, the scheme administrator needed to exercise discretion in their favour. They also argued that it wasn’t a sure thing that the administrator would have followed their mother’s expression of wish form. The sons’ arguments were also rejected by the judges.
Now, it’s no surprise that this particular case had caused a bit of a stir amongst pension members, mainly due to the startling possibility that those who were terminally ill could face an IHT tax charge if they decided to transfer their pension to attempt to take advantage of death benefits and die within 2 years.
Furthermore, if someone was completely unaware that they had a terminal illness in the first place, what would HMRC’s position be in such a scenario? As of now, HMRC’s reaction is still unclear if ever such a situation were to occur.