The Pension Transfer Trap

Posted on Tuesday October 30, 2018

Jeffrey Cohen

By Jeffrey Cohen, Head of Private Client at International Law firm Mackrell Turner Garrett

In the recent case of Staveley, the Court of Appeal confirmed that HMRC was correct in levying a 40 per cent inheritance tax charge on the beneficiary of a pension fund.

The facts of the case are fairly straightforward. Mrs Staveley was ill. She had a pension fund which would have passed to her former husband.

However, she wished for that to be passed to her children. Although she was terminally ill she went ahead and transferred the pension fund to her sons.

HMRC contended that it was chargeable to inheritance tax and that has now been upheld by the Court of Appeal.

This case highlights the importance of taking advice before proceeding with any transfer. Mrs Staveley had not drawn down on any of the pension benefit and HMRC, therefore, considered the transfer to her sons as a gratuitous benefit. As she died just one month later that was treated as a gift and subject to IHT.

This ruling does fall in line with several other cases in the past dealing with omissions to act. For example, if a person is entitled to drawdown the pension and they postpone it, if that pension is then paid to their children HMRC will make a charge to inheritance tax.

Obviously, all the different circumstances must be taken in to account. In this particular case, she knew she was ill and the transfer was done deliberately to try to avoid inheritance tax.

The same principle will apply if a person takes out a life policy when they are terminally ill. Even if they write that on trust for their beneficiaries, which would normally mean it would fall outside of their estate and therefore inheritance tax-free, nonetheless, in those circumstances, once again it will still be chargeable to inheritance tax at 40 per cent.

It is, therefore, more vital than ever that appropriate professional advice should be sought on succession planning and inheritance tax.

If you would like assistance with any private client matter, please call +44 (0) 207 240 0521or email