Upper Tribunal confirms transfer of pension fund is not a transfer of value for IHT purposes
In HMRC v Parry & Others  UKUT 4 (TCC), the Upper Tribunal (UT) held that a transfer of funds from a registered pension scheme to a personal pension plan made by the deceased shortly before her death was not a 'transfer of value' for the purposes of section 3, Inheritance Tax Act 1984 (IHTA). Similarly, the deceased's omission to exercise her right to take lifetime benefits from the personal pension plan was not a transfer of value.
As part of her divorce settlement, Mrs Staveley (the deceased) gave up her job in her former husband's company and received her share of the company pension fund. She was advised by an actuarial company that, in light of the law at the time, her best option was to transfer her fund into a buyout policy under section 32, Finance Act 1981 (the s.32 buyout policy). Although this would provide her with independence on a choice of investments, any surplus on the fund would be returned to the company on her death. Her pension fund was over-funded in respect of her level of salary and she was advised that she would have to wait 10 years before she could transfer the fund to a personal pension plan, the terms of which would enable the entire value of the fund to be paid to her estate or beneficiaries.
The deceased did not want her former husband to benefit from her pension fund upon her death and in July 2000, shortly after the conclusion of her divorce, she transferred her fund from the company occupational pension scheme into the s.32 buyout policy.
In 2004, she was advised that in light of legislative changes that were expected to come into effect in April 2006, she would be able to transfer her fund to a personal pension plan after 6 years, rather than 10 years. In 2005, she made a will which provided that her estate was to be divided equally between her two sons. In November 2006, she applied for her fund to be transferred to a personal pension plan. As part of that application she completed an expression of wishes by requesting that her death benefits be paid equally to her two sons.
The personal pension plan began on 9 November 2006. Whilst the policy allowed the deceased to have access to lifetime benefits, she died on 18 December 2006 without accessing any of the fund. Under the policy, the scheme administrator had discretion to pay death benefits to all or any of: (i) the persons nominated by the deceased (ie her two sons); (ii) her grandchildren; or, (iii) her personal representatives. In 2007, the scheme administrator exercised its discretion and paid the lump sum death benefit to the two sons in equal shares.
HMRC issued notices of determination to inheritance tax (IHT) to the deceased's personal representatives and her two sons (who were the beneficiaries of the death benefit paid out of the personal pension plan after her death), in respect of two alleged lifetime transfers of value by the deceased. The alleged transfers of value arose from the transfer by the deceased of funds from one registered pension scheme to another and from her omission to take any lifetime benefits from her personal pension plan.
The personal representatives and sons appealed the notices of determination.
The First-tier Tribunal (FTT) accepted that the transfer of the fund from the s.32 buyout policy to the personal pension plan was not a transfer of value and allowed the appeal on that issue but concluded that the deceased's decision not to take her pension benefits had preserved the value of her estate for her sons and found in favour of HMRC on that issue.
HMRC appealed in respect of the first issue and the personal representatives and the deceased's sons cross-appealed on the second issue.
The issues before the UT were whether (1) the transfer from the s.32 buyout policy to the personal pension plan was a 'transfer of value' which attracted IHT; and (2) whether the deceased's omission to exercise the right to take lifetime benefits from her personal pension plan was a 'transfer of value' which attracted IHT.
HMRC's appeal on the first issue was dismissed and the taxpayers' appeal on the second issue was allowed.
It was common ground that the transfer to the personal pension plan had reduced the value of the deceased's estate. This would constitute a transfer of value, subject to section 10, IHTA (dispositions not intended to confer gratuitous benefit). In order to rely upon section 10 a number of conditions have to be satisfied.
First, the taxpayer has to show that the disposition was not intended to confer a gratuitous benefit on any person.
Second, it has to be shown that the disposition was not made in a transaction (including a series of transactions or any associated operations) intended to confer such a benefit.
Third, it has to be shown either that the disposition was itself made in an arm's length transaction between unconnected persons or, if not, that it might be expected to be made in a transaction at arm’s length between persons not connected with each other.
The UT found that all of these conditions were satisfied and that the FTT had been entitled to find that the disposition by the transfer of funds from the s.32 buyout policy to the personal pension plan was not intended to confer a gratuitous benefit on any person. The UT also found that the deceased's sole motive had been to prevent any further pension funds from benefitting her former husband.
HMRC had argued that the transfer and the deceased's omission to take lifetime benefits from her pension as 'associated operations'. The UT rejected that submission and concluded that the transfer and the omission were unconnected and were not part of any scheme to confer a benefit on the deceased's sons. The transfer was an arm's length transaction between unconnected parties. In the view of the UT, the surrender and transfer themselves and the personal pension plan, were unexceptional, and the expression of wishes in the personal pension plan was a feature of an arm's length transfer into a pension of that nature. In the circumstances, the transfer was not a 'transfer of value' for the purposes of section 3, IHTA.
The UT was of the view that the FTT had erred on the issue of causation. Section 3(3) provides that where the value of one person's estate is diminished and another's value increased due to the first party's omission to exercise a right (here, the deceased's omission to enjoy the lifetime benefits from her personal pension plan), that party will be considered to have made the disposition at the time when they could have exercised their right. The direct cause in the increase in the values of the two son's estates was due to the exercise of the discretion of the scheme administrator, rather than the deceased's omission to exercise her right to lifetime benefits. The UT therefore concluded that the conditions in section 3(3) were not satisfied and the omission could not be treated as a disposition or as a transfer of value.
This case illustrates the importance of thorough preparation when bringing an appeal before the FTT. The FTT found that the transfer by the deceased from the s.32 buyout policy to the personal pension plan was not intended 'to confer a gratuitous benefit on anyone person', within the meaning of section 10, IHTA, and was not a transfer of value for the purposes of section 3, IHTA. Given such a finding, it was always going to be difficult for HMRC to persuade the UT to reach a contrary conclusion.
A copy of the decision can be found here .