Staveley case: summary and outcomes

On 19 August the Supreme Court published its final judgment in a high profile case examining whether an inheritance tax (IHT) liability had been created by a person transferring to a new provider whilst knowingly in ill-health.

Background

Mrs Staveley had a section 32 pension policy from a divorce. Under the pre A-Day pension rules, the surplus in the pension could have been returned to her ex-husband’s company on her death. A few weeks after receiving a terminal prognosis for cancer, Mrs Staveley transferred to a personal pension to remove the possibility of this happening. A few weeks after the transfer, Mrs Staveley passed away. The administrator followed Mrs Staveley’s expression of wishes and paid the death benefits to her sons, who were also named as the beneficiaries of her will, and so would have received the benefits from the section 32 policy via the will if the transfer hadn’t taken place. It’s also important to note that Mrs Staveley deliberately chose not to access pension benefits during her lifetime.

HMRC argued that two separate actions had created ‘transfers of value’ for IHT purposes: firstly, Mrs Staveley’s decision not to access her pension, and secondly, the transfer itself.

The Supreme Court’s final judgment is that the first action has created a transfer of value, and the second has not.

Omission to take benefits

Fortunately, the ruling which went against the appellants isn’t something which could affect more recent comparable cases. It related to a part of the IHT legislation which says that a transfer of value can be created if someone omits to exercise a right, and as a result, their estate is diminished and someone else’s increases. An exemption was added in 2011 to explicitly state that omitting to exercise a right in relation to pension benefits in a registered pension scheme is not caught by this rule.

Transferring while in ill-health

The second ruling not only gave the outcome the industry was hoping for; it also provided some much-needed clarity over some areas of concern raised by previous rulings. Here, the discussion centres on an exemption in the legislation which says there’s no transfer of value if it can be shown that the transaction was not intended to ‘confer any gratuitous benefit’ on anyone. The rules also allow for the term ‘transaction’ to mean ‘a series of transactions and any associated operations’. Therefore the Court considered two questions: whether Mrs Staveley intended to confer a benefit with the transfer itself, and also whether the transfer and omission to take benefits could be considered together as a series of transactions. It was accepted that Mrs Staveley’s omission was intended to confer the benefits on her sons.

            Series of transactions

The Court of Appeal had said the transfer and omission could be linked as a series of transactions. It was a concerning ruling, as it wasn’t clear how far it was possible to go to find an ‘associated operation’ which could be seen as intending to confer a benefit. It was also unclear whether omitting to take pension benefits could still be treated as an associated operation, given that such an action in itself is now exempted from creating a transfer of value.

The Supreme Court clarified that transactions can only be linked where there is a common motive. In other words, if the transfer had been in some way necessary in order for Mrs Staveley to omit taking benefits to confer them on her sons, then the two actions could have been linked. As the transfer made no difference to the omission, the transfer could only be considered on its own. Although the judges were not in complete agreement on this point, it is reassuring that the majority deemed there to be a limit on the scope of associated operations.

            Conferring death benefits

The previous rulings were in general agreement that Mrs Staveley’s sons were in a materially better position after the transfer, as the death benefits from the personal pension were not subject to IHT as the benefits from the section 32 policy (by way of the will) would have been. Assuming that the sons had in fact had a benefit conferred on them, the focus was on whether Mrs Staveley intended this to be the case. However, the Supreme Court questioned whether a benefit had been conferred, on the basis that the sons had no rights to benefits under the section 32 policy, the will, or the personal pension. Mrs Staveley could have changed her will at any time. She could have changed her expression of wishes – and the administrator might not have followed it. Mrs Staveley also could have accessed her pension at any time. Therefore the transfer itself did not confer any benefits, and the Court stated it would be ‘surprising’ to still conclude that there was a failure to show that Mrs Staveley hadn’t intended to do so.

            Is a pension transfer a transfer of value?

Aside from the exemptions we’ve discussed, a transfer of value is defined as:

‘…a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition…’

The industry’s understanding of HMRC’s view is that during a pension transfer, the right to decide where the death benefits go effectively returns to the estate. By choosing to transfer to a pension where the administrator has discretion, a person creates a transfer of value under the above definition (assuming no exemptions apply).

However, the Supreme Court’s judgment seems to question this; albeit not directly and perhaps not even intentionally. Firstly, it states that Mrs Staveley’s transfer is agreed to be a disposition ‘because she no longer had the right to determine the destination of the death benefits’. This is true for Mrs Staveley because she transferred from a scheme that would pay death benefits to her estate, to one where the administrator had discretion. It seems to look at the difference between the two pensions, rather than comparing the position at the new pension with a moment just before the transfer, when the funds were (according to the view outlined above) deemed to be momentarily returned to the estate.

There’s further evidence in the Supreme Court’s rejection of what it calls HMRC’s ‘return to zero’ approach. According to the Court, part of HMRC’s argument for Mrs Staveley having conferred a benefit on her sons required there to be ‘a moment when rights under the section 32 policy have ended, but rights under the [personal pension] have not yet begun’. This was dismissed by the Court as a ‘wholly artificial analysis’ which ‘ignores the reality’ of how pensions transfer between providers. The idea that the right to decide where death benefits go returns to a person’s estate seems to similarly rely on the return to zero approach. With it rejected, it seems to follow that in a transfer between two schemes with administrator discretion over death benefits, there’s no moment at which the right to assign death benefits can return to the estate. If that’s the case, it’s also not possible for the value of the estate to be diminished, which would mean it couldn’t create a transfer of value.

 

There’s much to explore in this Supreme Court ruling, and we’ve no doubt the case will be discussed throughout the industry for a long time to come. It’s very early days of course, but it does seem as though the ruling could set some very positive precedents for future cases.