Tax­man loses out in land­mark in­her­i­tance rul­ing by top judges

The Daily Telegraph - Business - - Business - By Jes­sica Beard

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 tax­man can prove some­one took ac­tion with their pen­sion with the in­ten­tion of lim­it­ing the tax bill due on their es­tate. The judges’ rul­ing 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 Ap­peal, which had ruled in favour of charg­ing the ad­di­tional tax.

This was the third judg­ment 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. 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 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.

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