The Staveley case and pension transfers

In July 2000 Mrs Staveley transferred her section 32 plan to a personal pension plan whilst in ill health. Over 20 years later the legal proceedings finally concluded when on 19 August 2020 when their Lordships handed down their judgment which found that, on the facts of that case, the defence in section 10 IHT Act 1984 (“no intention to confer a gratuitous benefit”) neutralised any transfer of value by Mrs Staveley under section 3(1) IHT Act 1984.

The time taken to bring this to a conclusion shows just how complex this area of legislation is and the ruling demonstrates how important the precise facts of each case are. 

The decision is to be welcomed but it must be treated with caution, in light of the unusual facts in the case – in particular Mrs Staveley’s desire to stop her ex-husband benefitting and the incorrect IHT advice she had been given (Mrs Staveley was wrongly informed by her financial adviser that the transfer of her pension plan would not cause the death benefits to be treated differently for IHT).   

However, it has now been established that it is possible, in the right circumstances, to use the section 10 defence to prevent a transfer of value arising on a pension transfer where the pension scheme member is in serious ill health. The key question is, how easy is it to show there was no donative intent when the transfer was made?

Clearly most people who have transferred their pension rights/plan and died within two years will not have had a motive similar to the strong fixed intention that Mrs Staveley had to avoid her ex-husband benefitting at all costs.

However, the case does raise other important questions. For example:

• Is HMRC’s “return to zero” interpretation set out in IHTM 17027 correct?

HMRC use this interpretation to justify that a disposition takes place that gives rise to a transfer of value but should it be used in determining whether a person intended to confer a benefit?

In this context, Lady Black’s judgement questions HMRC’s “return to zero” approach.  She believes that when considering whether the pension transfer confers a benefit you should compare the position after transfer with the position before transfer.  She believes HMRC adopt a “wholly artificial analysis” when they treat the pension benefits as coming back into the individual’s estate in that scintilla of time between the transfer from one pension plan to another. 

If one adopts Lady Black’s more practical (pre and post transfer) analysis of the position, it would seem that this will make it more difficult for HMRC to reject section 10 defences.  This is on the basis that it is difficult to see how a benefit is conferred in a case where the pension transfer is between defined contribution (DC) schemes because the real “before” and “after” situation will be very similar if not identical. 

This could not therefore be treated as part of the overall transfer transaction which could taint the pension transfer and give it donative intent. 

• Whenever somebody makes a pension transfer when they are in serious ill health, then to avoid the transfer being subject to inheritance tax as a transfer of value, it will be necessary to show that the transfer was made for reasons that did not involve the conferring of a benefit on another pension.

As death benefits under registered pension plans are generally free of inheritance tax, there is no real additional IHT advantage in transferring between schemes.  This again is an argument in favour of there being no intention to confer a gratuitous benefit as many transfers will be neutral for inheritance tax as Mrs Staveley thought was the position with her transfer.  However, is likely that HMRC would need stronger reasons than this. 

Even if a person can show “no conferral of benefit”, it is apparent from the decision that this defence can be neutralised where that person decides not to draw benefits.  The question is therefore if somebody aged 55 or over is not drawing benefits from their current defined contribution pension plan and they make a transfer to a new DC pension plan from which they continue to not draw benefits, can this be regarded as a new omission which, when combined with the pension transfer, shows a donative intent?  In Staveley, the Judges thought not, because Mrs Staveley had already made the decision not to draw down from her section 32 plan before transfer.  This could not therefore be treated as part of the overall transfer transaction which could taint the pension transfer and give it donative intent. 

However, the section 10 defence looks less likely to be available in cases where the decision not to draw benefits is made after the pension transfer as the omission not to draw benefits could then be viewed as part of the transaction/scheme which gives the transfer a donative effect.  Of course, the omission itself is no longer a transfer of value as the rules on this were changed in 2011, but it would still have the impact of increasing the death benefits available for somebody else and so could influence the decision as to the intention of the individual who made the pension transfer. 

For people who transfer at an age below 55, the omission to draw benefits question is unlikely to be relevant.  For them, it is only about whether the pension transfer was made for reasons other than conferring a benefit on another person. 

• It is thought that a transfer from a defined benefit pension scheme with limited death benefits to a DC scheme with bigger death benefits linked to the value of the fund would have a donative intent for somebody in serious ill health and so here the section 10 defence will be very difficult to maintain.

It has to be borne in mind that this decision was made on the particular facts of the case. In this case, there was strong evidence that Mrs Staveley’s sole reason for the transfer was to avoid her ex-husband benefiting on her death. Furthermore, because she had been given wrong advice on the IHT position of the death benefits pre and post transfer, she was probably labouring under the misapprehension that this would not improve the net benefit received by the sons.

For HMRC to accept the section 10 defence, it is thought that (at least for the time being) equally compelling other non-gratuitous based reasons would need to apply and that those reason(s) would need to be the sole reason for the transfer.

It remains to be seen whether HMRC will change their approach on these pension transfer IHT cases in light of this judgment.