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Pensions transferred by terminally ill woman liable to IHT, Court of Appeal rules

HMRC win appeal where divorcee sought to prevent husband receiving any of her pension

A pension fund, transferred by a divorced and terminally ill woman in order to prevent her ex-husband from receiving any of it, is subject to Inheritance Tax, the Court of Appeal has ruled.

In The Commissioners for Her Majesty's Revenue and Customs v Parry and Others [2018] EWCA Civ 2266, the Court of Appeal heard that Mrs RF Staveley had successfully built up a company, Morayford Ltd ("M"), with her husband. She was a director of it. The couple divorced (it is said acrimoniously) and as part of a settlement for the divorce M granted her a pension in the form known as a "section 32 buyout policy" (that is, a pension policy to which section 32 of the Finance Act 1981 applied). In October 2006, within two months of her death on 18 December 2006, aged only 56 years, she transferred this section 32 policy to a personal pension policy, referred to in the judgment as "PPP", issued by AXA.

If Mrs Staveley's pension had remained in the section 32 policy then on her death a lump sum would have been payable to her estate and chargeable to IHT. Under the PPP, Mrs Staveley nominated her two sons as her beneficiaries in relation to the death benefit, so that it might be paid direct to them on her death. At all times they were residuary beneficiaries under the terms of her will, which was dated 31 March 2005. Mrs Staveley did not take any retirement benefit so that at the date of her death the whole of her pension fund was uncrystallised. Although she did not appreciate this, that meant that, if the purchase exemption applied, the sons would receive the death benefit free of IHT.

The First Tier Tribunal had found that Mrs Staveley's sole motive for the transfer was to avoid the possibility of any part of her pension funds reverting to M, and thus to her former husband.

HMRC challenged her decision and applied IHT on the pension that passed to her sons. It argued that the pension transfer was a chargeable lifetime transfer, or transfer of value, as it intended to reduce the value of her estate for IHT purposes.

In 2017 the First Tier Tribunal rejected HMRC's case and that decision was upheld by the Upper Tier Tribunal. However, the Court of Appeal has unanimously decided that the pension fund is subject to Inheritance Tax, albeit the reasoning of Lady Ardern of Heswell differed from that of her fellow judges Newey LJ and Birss J.

For the judgment, click here.