Pensions, transfers, death benefits and inheritance tax

The Supreme Court has handed down a long-awaited decision on a complex case.

Mrs Staveley died in December 2006, but it was only in August 2020 that the Supreme Court settled the question of the extent of any inheritance tax (IHT) liability on her pension. In the intervening 13 years, the rules relating to pensions and IHT on death benefits have been changed several times, mostly reducing the impact of IHT.

Mrs Staveley’s case was examined at two tiers of tax tribunals and the Court of Appeal before reaching the Supreme Court. It says something of the complexity of the legislation and the various arguments involved that none of this quartet agreed on their decisions. One key question, that all four considered, was whether the transfer of a pension shortly before death could represent a gift for the purposes of IHT. Eventually, the Supreme Court ruled that for Mrs Staveley, it was not. This was widely reported in the national press as an important victory, confirming that pensions are IHT-free.

Unfortunately, much of the coverage represented a significant – and potentially dangerous – simplification. For a start, Mrs Staveley’s pension did end up being subject to IHT, albeit as a consequence of legislation which was amended in 2016, retrospective to 2011. Secondly, and more importantly, the Supreme Court’s decision, like any legal judgement, was based on the facts of the particular case.

In this instance, the pension transfer was effected primarily to make as certain as possible that Mrs Staveley’s ex-husband could not benefit from her pension fund on her death; in many close-to-death situations, the focus of the transfer is on ensuring who will receive the benefit of the pension value. Another difference from today’s norm was that Mrs Staveley’s transfer was from an old style of individual pension policy (a section 32 plan) rather than a final salary occupational scheme.

Pension arrangements can play an important part in estate planning and, under the law as it stands in 2020, will normally provide death benefits free of IHT (although income tax could apply on death at or after age 75). Clearly, advice is essential, especially if making pension transfers or contributions in a close-to-death scenario.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

25th September 2020