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Transfer of Pension Fund Does Not Escape IHT Charge

Inheritance Tax (IHT) is not only payable on the value of the estate of a deceased person, but can also be levied on 'transfers of value' from the deceased's estate in the seven (exceptionally 14) years prior to their death.

But what counts as a transfer of value? A recent court case led to a conclusion that many might see as unfair and rather counter-intuitive.

It involved a woman who had been divorced from her husband since 2000. As part of the financial settlement on divorce, a 'pension split' was agreed whereby she took a share of her ex-husband's pension. This was put into an 'old style' scheme called a 'Section 32 buyout'. Six years later, she transferred that scheme into a 'new style' personal pension plan. These have the advantage that the pension fund can be transferred to family members directly if the pension owner dies, so there is not normally any IHT to pay. Under the Section 32 provisions, the lump sum on death would have been paid to her estate and would have been subject to IHT.

Two months after making the transfer she died, having nominated her two sons to receive the value of her pension fund. Her executor claimed that the transfer took the fund outside of IHT…the argument essentially being that the fund was hers before the transfer and hers afterwards, so there was no transfer of value to anyone else.

HM Revenue and Customs were successful in defeating that argument in the Court of Appeal on the ground that the transfer was intended to confer a gratuitous benefit to her sons out of assets in her control.