In the case of Commissioners of HMRC v Parry & Others, the Court has decided that a charge to Inheritance Tax (IHT) arose in relation to a transfer from a defined benefit scheme to a defined contribution arrangement within two years of the member’s death.
Background
Mrs S transferred her defined benefit pension rights to a personal pension in 2006. She did not take any benefits from the personal pension and died six weeks after the transfer was made. HMRC deemed both the transfer and the failure to take benefits as “transfers of value”, so sought to charge IHT.
The defined benefit scheme had a binding nomination rule for death benefits, rather than a discretionary choice of beneficiary, meaning that the death benefits would have been subject to IHT. It also provided that any surplus in the scheme could pass back to a company Mrs S had established with her ex-husband – and she wished to avoid this happening.
Under the personal pension scheme Mrs S had nominated her two sons as her beneficiaries.
The case was heard in First Tier and Upper Tier Tribunals, with conflicting outcomes, so passed to the Court of Appeal.
The judgment
The Court considered that the key issue was not whether the sons’ position had actually been improved but whether Mrs S had intended that it should be improved. It held that Mrs S had transferred her benefits in order to:
- break the link to her ex-husband’s company and
- avoid the IHT liability that would have arisen in the defined benefit scheme.
It held further that Mrs S’s failure to take benefit from the personal pension was motivated by a desire to maximise the funds available to her sons. As Mrs S nominated her sons within two years of her death – and had reason to believe that she would not survive for two years – the disposition of the benefits was not exempt from IHT.
Comment
The binding nomination rule is unusual, so largely peculiar to this case. However, the case does highlight the danger for members in serious ill-health transferring to a defined contribution arrangement. Having said that, the residual benefits after payment of IHT may well still exceed the death benefits payable from the defined benefit scheme in many cases. In any case, tax advice should be taken by any member considering this course of action.