Clare Moffat: What advisers need to know about the Staveley case

Clare Moffat looks at the outcome of the long-running Staveley case which brought clarity to IHT liabilities in light of pension transfers or switches made in ill-health. Here she explains everything advisers need to know

The long-running case of Commissioners for Her Majesty’s Revenue and Customs (Respondent) v Parry and others (2020)  – also known as the Staveley case – has hit the press again.

While the facts of the case date back to 2005/06 it remains of huge importance to advisers due to its implications for those clients who make a pension transfer or switch in ill-health and death happens within two years.

There has been an increase in such cases post-pension freedoms as a means of accessing death benefit flexibility and the ability to cascade wealth through the generations. After the Court of Appeal decision in 2018, there were concerns about the application of the facts to the discretionary defined contribution (DC) to DC switch world. Would a terminally ill client switching for genuine commercial reasons bring the fund into the realm of inheritance tax (IHT)?

The facts of the case

Mrs Staveley had a section 32 policy which had a feature which meant that any surplus in the policy would pass back to her employer (who happened to be her ex-husband) on her death. She found out that she was terminally ill and died on 18 December 2006.

In November 2006, she transferred funds from the section 32 policy into an AXA personal pension (PP). This meant that the death benefits were moving from a return of fund, which was payable to her estate, to a return of fund which was paid at scheme administrator discretion. Mrs Staveley’s two sons were the beneficiaries under her will and the nominated beneficiaries under the PP.

Because she was terminally ill, HM Revenue & Customs (HMRC) decided that the transfer and “the omission to act” by not taking any benefits were both “transfers of value”  which were linked and designed to reduce the value of her estate for IHT purposes.

HMRC lost this case at the First-Tier Tribunal (FTT) and the Upper-Tier Tribunal (UTT) but won at the Court of Appeal.  It was then heard by the Supreme Court in October 2019 before the judgement was delivered on August 19 2020.

Was there a transfer of value?

It was accepted as a fact that the sole purpose Mrs Staveley wanted the transfer to take place so that her ex-husband could not receive any of the money.  Section 3 of the Inheritance Tax Act 1984 applied as it was “a disposition made by a person (the transferor) as a result of which the value of their estate immediately after the disposition is less than it would have been but for the disposition”.

Was there intent?

Section 3 is also subject to section 10, which deals with dispositions which are not intended to confer gratuitous benefit. So did the transfer of value satisfy the section 10 test?

Mrs Staveley had the power to choose the beneficiaries before the transfer. After the transfer, it was at the scheme administrator’s discretion.  However, the UTT and the FTT said that the facts meant the transfer was not intended to confer gratuitous benefit.  The Court of Appeal agreed with HMRC. But the Supreme Court disagreed with the Court of Appeal and stated that the transfer did not give rise to IHT.  This was based on that agreed fact that Mrs Staveley’s sole reason to transfer was to deprive her ex-husband. And intent is crucial.

There was another element to the case which involved omission to act. The Supreme Court allowed the appeal from HMRC on this and it was found that there was omission to act and IHT due.  Although relevant to the case, it doesn’t have wider application now due to the change in the law in 2011 in relation to omission to act.

What is the impact for your clients?

As before, if there is a DB to DC transfer when a client is terminally ill then the beneficiaries may have an IHT bill if death occurs within two years. There is an intention to confer a gratuitous benefit. But for many clients, the move from DB to DC is due to the fact that benefits would cease on their death and paying IHT would still give beneficiaries 60% of something rather than 100% of nothing and so the transfer is still usually suitable.

The FTT made a comment that if a DC to DC transfer or switch took place which was for commercial reasons or there wasn’t a change in beneficiaries then it might not be a transfer of value. The Supreme Court, by rejecting HMRC’s appeal on this point, shows that if a terminally ill client switches between two fully flexible discretionary DC schemes for commercial reasons with no change in beneficiaries, then section 10 would apply. The transaction is not intended to give gratuitous benefit.

Dealing with clients in terminal ill-health is difficult. These clients often want to make things easier on their death for loved ones and that can often mean consolidating pensions or generally making sure that their affairs are in order.  This judgement means an administrative process won’t cause more heartache in terms of IHT.

Clare Moffat is head of the intermediary development & technical team at Royal London