Tait’s Modern Pension

MODERN

PENSIONS

Definitive court rulings on the treatment of pensions with regards to inheritance tax are few and far between and so the recent High Court judgement on the Staveley case is significant, not just for its outcome but for the arguments presented regarding 3 crucial aspect of pension death benefits.

The facts

• Mrs Staveley held a section 32 pension policy as part of a divorce settlement from her ex-husband. Death benefits under this plan would be paid into her estate and distributed in accordance with her will.

• Under the (pre A-Day) rules at the time any surplus under this plan could have been returned to her husband’s company, where the benefits had originated, on her death.

• Having been diagnosed with terminal cancer, Mrs Staveley transferred her benefits to a personal pension plan and named her sons as beneficiaries in order to ensure her husband would not receive any benefits after her death.

• Mrs Staveley did not take any benefits from either of these plans, although she was eligible to do so.

HMRC’s view was that 2 ‘transfer of value’ had taken place

1. When the benefits were transferred away from the section 32 plan.

2. When Mrs Staveley deliberately chose not to withdraw money from her plans.

Transfer of value

The definition of a ‘transfer of value’ is a transfer [of assets] which reduce the value of the transferor’s estate. This has long been a contentious point when it comes to pensions as most pensions are not paid to the policyholder’s estate. Mrs Staveley’s case is slightly unusual in that the benefits would have been paid to her estate had they been held in the section 32 plan at the time of her death, and her sons would therefore have been due to pay a potential IHT charge. However, by the time her death occurred the benefits were paid from the personal pension under trustee discretion. It would seem therefore that the benefits had never been in Mrs Staveley’s estate and this could not be a transfer of value.

HMRC’s argument, and one which has long been understood by the industry, was that the funds did actually pass through the estate during an intermediate stage within the transfer process:

1. Transfer of funds from the s32 plan.

2. Theoretical ‘return to zero’ moment when rights under the s32 plan ceased, but rights under the personal pension had not started and the funds are deemed to be in the control of the member. 3. Subsequent transfer from the estate to the personal pension.

Fortunately for the next generation, the Supreme Court took the view that this was a ‘wholly artificial’ procedure and confirmed that the estate did not at any time have control over the disposition of the funds.

Ill-health

It is undeniable that Mrs Staveley was in extreme illhealth when she took the decision to transfer her s32 plan, and it was commonly thought that a transfer in these circumstances would result in an IHT charge.

The Staveley argument was that the mother’s motivation was to prevent her husband from benefitting, and not to confer any ‘gratuitous benefit’ to her sons.

In fact The Supreme Court decided not to focus on motivation, but on the argument that Mrs Staveley’s sons did not in fact achieve any gratuitous right to the benefits, either under the s32 or the personal pension as Mrs Staveley could have taken benefits out of the plan, or changed either her will or the expression of wish at any time. The transfer from the s32 plan was therefore deemed not to be a transfer of value, despite the fact that the sons ended up with more money by not having to pay the IHT, than would have been due had they received the benefits from the estate.

Omission to take benefits

On the second question, that of omission to take benefits, the Supreme Court took the view that this had resulted in a transfer of value since these benefits would have formed part of Mrs Staveley’s estate. This is however based on a rule that was in place at the time that specifically stated that a transfer of value can result if an individual fails to take the benefits they are entitled to. Fortunately for future generations an exemption was introduced in 2011 in respect of pension benefits, without which the current pension freedoms would simply not work.

Considerations going forward

The key issue to consider is what will happen to death benefits following a transfer made in serious ill-health. The Staveley case would seem to indicate that the ‘2 year rule’ which we are obliged to warn our clients about when transferring benefits may in fact not apply. That said, the Staveley case was also based, at least in part, on the issue of motivation and gratuitous benefit, so it seems we may need to wait for another high profile case (or a change in the IHT rules) before we can be sure of the outcome for the next ‘Staveley’. To be on the safe side, we will certainly not be dropping the warning while this uncertainty remains.