In HMRC v Parry & Ors [2018] EWCA Civ 2266, six weeks before her death and when in ill health, Mrs Staveley transferred pension benefits from one pension scheme to another. Under the original scheme, the benefits would have passed into her estate on her death (subject to inheritance tax (IHT) at 40%) and distributed to her sons under her Will. Under the new scheme, the benefits would be payable free of IHT at the discretion of a scheme administrator.
HMRC treated the transfer between the pension policies as a "chargeable lifetime transfer" followed by an "omission to act", because Mrs Stavely was terminally ill when she made the transfer and "omitted" to take any benefits from the pension. HMRC's view was that the two elements were linked and intended to reduce the value of her estate for IHT purposes and increase her sons' estates as a result. Therefore HMRC sought to charge inheritance tax on the transfer.
As her personal representatives, her two sons argued that transfer was not intended to confer a gratuitous benefit and was therefore exempt from inheritance tax. However, the Tribunal found that her "omission" had diminished the value of her estate and increased the estates of her sons, so the omission itself was a "transfer of value" and subject to IHT.
The Upper Tribunal allowed the personal representatives' appeal, holding that although her "omission" in not accessing her pension had been the source of the funds which were paid to the sons, it was ultimately the exercise by the new scheme's administrator of its discretion that caused the increase in their estates.
HMRC appealed to the Court of Appeal, which reversed both decisions. On the subject of the transfer, the Court of Appeal accepted the sons' argument that there had not been gratuitous intent in making the transfer. However, it accepted an alternative argument advanced by HMRC that the transfer was caught, and thus taxable, as an "associated operation". On the omission, the Court of Appeal considered there was a causative link between the omission to take a benefit and the increase in the sons’ estates.
The sons have been granted permission to appeal to the Supreme Court, making this one of only a few inheritance tax cases to be considered by the most senior court in the country. The case highlights the complicated rules on inheritance tax and transfers of pensions when in ill health.