David Rees succeeds with Inheritance Tax Appeal in HMRC v Parry & Others  UKUT 0004 (TCC)
David Rees appeared for the taxpayers in this appeal from a decision of the First Tier Tax Tribunal.
The case related to decisions made by Mrs Rachel Staveley in relation to her pension fund shortly before her death in 2006. A month before her death, Mrs Staveley transferred her pension from a scheme under which the death benefits would pass to her estate into a new personal pension scheme under which the benefits were payable at the discretion of the scheme administrator. She also omitted to take any benefits from the scheme prior to her death. HMRC sought to charge both events to tax, on the basis that the transfer between schemes was a transfer of value under section 3(1) Inheritance Tax Act 1984 and that the omission was to be treated as a further transfer of value by virtue of section 3(3) IHTA 1984.
In May 2014 the First Tier Tribunal allowed the taxpayers’ appeal in respect of the transfer between the two pension schemes, holding that on the evidence before it, it was satisfied that in making the transfer Mrs Staveley had not had any intention to confer a gratuitous benefit. The transfer was thus prevented from being a transfer of value by section 10 IHTA 1984. However, the FTT also held that the effect of the omission by Mrs Staveley to take lifetime pension benefits had been that her estate had been diminished and the estates of her sons (to whom the death benefits were subsequently paid by the pension scheme administrators) had been increased. The omission was thus deemed to be a transfer of value by virtue of section 3(3) IHTA 1984 and tax was accordingly payable in respect of it. The FTT rejected the taxpayers’ argument that the exercise by the scheme administrators of their discretion to decide to whom the death benefits were paid amounted in a break in the chain of causation, holding that it was “virtually inevitable” that the sums would be paid as per Mrs Staveley’s expressed wishes.
Both parties appealed against the judgment of the FTT, and the appeals were heard by the Upper Tier Tribunal (Barling J and Tribunal Judge Berner) in December 2016. The UTT dismissed HMRC’s appeal on the first point, holding that the FTT had been entitled on the evidence before it to conclude that the transfer between the two schemes had not been made with the intention of conferring gratuitous benefit.
The UTT allowed the taxpayers’ appeal on the second point. It held that although the omission by Mrs Staveley to access her pension before her death had been the source of the funds which were paid to the sons, nonetheless it was ultimately the exercise by the scheme administrator of its discretion under the terms of the pension contract which was the effective cause of the increase in their estates. Absent a finding of sham it was only open to the FTT to find that there had been a genuine exercise of discretion by the scheme adminstrator. Consequently it could not be said that those estates had been increased by the omission alone, and thus the omission was not deemed to be a transfer of value under section 3(3) IHTA 1984.