The judgment in the Supreme Court case of HMRC v Parry & Ors, also known as HMRC v Staveley, has been heralded as a landmark judgment by many wealth planners as it provides clarity over the tax treatment of pension transfers for clients in ill health.
However, advisors should tread carefully and refrain from treating this as a one-size-fits-all solution, as the case of Staveley was based on a very specific set of circumstances. In the case, terminally ill woman Ms Staveley had transferred some of her pension that had been set up with her ex-husband into a different pension pot just for her children to ensure that none of the pension could be returned to her ex-husband after their contentious divorce. Ms Staveley died just weeks later.
The Supreme Court ruled that Inheritance Tax (IHT) could be charged on the 'omission to act' but not on the 'chargeable lifetime transfer'.
The judgment provides some clarity, but, from an IHT position, Staveley is very specific and doesn’t provide a blanket clearance to all clients who decide to make pension transfers.
When providing estate planning advice, advisors must consider a client’s estate in full, including pensions and life insurance policies (which quite often pass outside of a Will or the intestacy rules where there is no Will) and other assets that pass under a Will or the intestacy rules. It’s advisable to identify which assets pass under a Will and which pass to named beneficiaries under a pension policy (as in the case of Staveley) or life insurance policy. By doing this, clients can fully understand the full extent of their estates and made an informed decision as to how they want to draft their Will and deal with their pensions and life insurance policies.
At Irwin Mitchell, we regularly work alongside financial planners in order to provide holistic planning advice to clients. Staveley may present us with a new estate planning opportunity, but it only applies to certain clients. The key is to look at a client’s estate in the round and identify what assets should be preserved and what can and should be accessed to provide an income during retirement. Some pension vehicles enable clients to nominate beneficiaries, which would avoid the need for a pension transfer. In the case of Staveley, if a nomination were permitted, Ms Staveley could have simply revised her nomination form so that the beneficiaries became her sons rather than ex-husband. This could have been done via the use of a trust or directly naming the sons. It would therefore be prudent for clients and advisors to review the terms of pensions and consider alternative ways of making changes to beneficiaries.
Where nomination forms are not applicable, as in the case of Staveley, pension transfers should be considered with caution and specific advice obtained from a lawyer and wealth planner. Any pension transfer still comes with the risk of triggering an IHT liability.
When carrying out any pension and estate planning, it is also important to seek legal advice on the drafting of a letter of wishes to sit alongside a Will and provide guidance to the executors and trustees as to why the Will has been drafted in such a way, in the context of decisions made regarding pension planning and any life insurance policies which may also pass outside of a Will. Although a letter of wishes is not legal binding, it’s important guidance which helps to explain the planning and minimise disputes on death.
Published: September 2020
A monthly briefing from Irwin Mitchell
September 2020
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