Yahoo Finance Victory for pensioners as judges say inheritance tax doesn't apply to gifts made in ill health
Judges have said controversial inheritance tax charges on pension pots transferred when the owner is terminally ill should not stand.
In a landmark case, the Supreme Court ruled against HM Revenue & Customs, which argued that pensions transferred to someone else within two years of death can be caught by the death duty if the owner was known to be in ill health.
Up until the ruling, anyone with limited life expectancy who transferred their pension and then died within the two-year window could receive large tax charges on their estate.
Pension transfers are granted an exemption from IHT provided the transfer itself was not meant to provide a “gratuitous benefit” to those receiving it. A gratuitous benefit is said to occur where the tax man can prove someone took action with their pension with the intention of limiting the tax bill due on their estate.
The judges’ ruling this week will make it more difficult for HMRC to argue a transfer was made with the intention of creating a gratuitous benefit.
The decision was made by the highest court in Britain, overturning a verdict made by the Court of Appeal, which had ruled in favour of charging the additional tax. This was the third judgement made in the Staveley case.
The late Mrs Staveley transferred her pension money out of a scheme at her ex-husband’s company. The pot was transferred to a personal pension plan to ensure that any payouts were handed to her sons rather than her ex-husband upon her death.
A death benefit was paid to the two sons, however HMRC claimed large sums of inheritance tax were due on the basis of gratuitous benefit. The judges ruled in their favour that the transfer should not be subject to IHT.
However, uncertainty remains as HMRC can still pursue cases according to Tom Selby, of pension provider AJ Bell.
He said: “This protracted case has exposed the complexity and confusion that exists around pensions and IHT.”
Even accountants struggle to understand the rules around gifting pensions money and IHT. The “common sense solution” would be to remove pensions from IHT altogether, argued Mr Selby.
Everyone has a £325,000 allowance before inheritance tax is due at 40pc. In addition, the "family home" allowance applies where a main residence is passed on to direct descendants. This is worth an additional £175,000 per person this tax year.
As married couples and civil partners inherit each other's unused allowances, a couple can pass on £1m free of death duties.
Pensions' tax treatment on death depends on the type of scheme. A "final salary" pension normally dies with the spouse of the scheme member, while "defined contribution" savings can be passed down indefinitely.
Unspent defined contribution money is taxed at the highest income tax rate of the person receiving it. In many cases, this means pensions are passed on entirely tax-free.
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