PENSION TRANSFERS: INHERITANCE TAX TRAP?

07 / 12 / 2020

A recent Supreme Court ruling has highlighted that transfers between registered pension schemes can have unintended inheritance tax (“IHT”) consequences. In this case, the late Mrs Staveley (“Mrs S”) was knowingly suffering a terminal illness and switched her pension fund between two fully flexible defined contribution schemes for commercial reasons. A transfer of a pension fund during lifetime can result in an IHT charge if the member dies within seven years of the transfer. In this case, as there was no change in beneficiaries (who remained Mrs S’s sons before and after the transfer), the transfer did not produce an IHT charge as an exemption applies where there is no intention to confer a benefit on the recipient. However, this exemption will not apply in all cases and HMRC maintain that transfers between pension schemes can result in potential IHT.

The case is also relevant for members who omit to exercise the right to draw benefits before death. The court found that Mrs S’s omission to draw benefits from her pension plan constituted a transfer chargeable to IHT on her death, as the executors could not prove that the omission was not deliberate. The law on omissions to exercise a right changed in 2011 but the rules remain relevant for unregistered pension schemes.

Concern remains generally over HMRC’s analysis of pension transfers. HMRC seem to view there being a moment in time between making the transfer and its receipt when the right to decide where benefits go is in the member’s estate for IHT purposes, thereby making the transfer from the member’s estate a transfer of value for IHT purposes. This is questionable in our view.

To summarise, pension transfers can be of very considerable value and may result in the family benefiting from the capital value of the pension fund in a way which would not be possible had the transfer not been made and the pension benefits remained in a final salary scheme. The administrative process of consolidating pensions should not cause more IHT although appropriate legal and tax advice should always be taken especially where the transfer is from a defined benefit (final salary) scheme to a defined contribution scheme.