HMRC -v- Parry and Others

Commissioners for Her Majesty’s Revenue & Customs (Respondent) v Parry and others (Appellants) Case ID: UKSC 2018/0208

This case is important as it clarifies the Inheritance Tax on lifetime pension scheme transfers, and the omission to subsequently take income benefits which were then payable. It involved careful judicial scrutiny of the relevant provisions of the Inheritance Tax Act 1984 (IHTA).

The Background

The case involved the estate of Mrs Staveley who passed away on 18 December 2006. Whilst she was alive, she was part of occupational pension scheme with a company that she had set up with her husband. Before Mrs Staveley died, she divorced her husband and had transferred the occupational pension fund under section 32 of the Finance Act 1981 to an AXA personal pension plan (PPP). Had the occupational pension remained in the company scheme, then on her death, a sum would have been payable to her estate and chargeable to inheritance tax.

Under the terms of the PPP, a death benefit lump sum would be paid out if no funds were drawn during the holder’s lifetime. Mrs Staveley's two sons were the nominated beneficiaries in relation to this death benefit. The sons, as executors of Mrs Staveley's will, argued that the deceased's motive was not to confer a gratuitous benefit on them. Instead, the transfer was to avoid any part of her pension fund reverting to the company, and thus to her former husband and partner in that company. Meanwhile, HMRC determined that inheritance tax was payable on the death benefit as they categorised the transfer and omission to take lifetime benefits as lifetime transfers of value that were subject to IHT.

The Decision

Inheritance tax is charged on ‘the value transferred by a chargeable transfer’ (section 1 IHTA). A ‘chargeable transfer’ is a ‘transfer of value’ and under section 3(3) IHTA transfers of value include transfers which decrease the value of the transferor’s estate and increase the value of another’s estate. Both sides agreed that that the transfer itself constituted a disposition that resulted in a reduction in value of the deceased’s estate as she no longer had a right to determine the destination of the death benefits in relation to the pension. However, section 10 IHTA provides an exception to dispositions that were ‘not intended to confer any gratuitous benefit on any person’. Such a disposition would not be a “transfer of value”, so IHT would not be chargeable. 

Lady Black noted that the term ‘benefit’ in section 10 IHTA must be given its ordinary definition and ‘involves a net gain or favourable change in a person’s position, but the comparison to be made is with his position immediately before the putative benefit was conferred.’ Lady Black argued that the intention of the deceased in making the disposition was important (i.e. the intention to prevent her ex-husband from gaining access to the funds rather than transferring a benefit to her sons). The transfer of funds itself was therefore not a transfer of value because section 10 applied and no IHT was chargeable on the transfer. 

The Supreme Court also considered the issue of whether Mrs Staveley’s omission to draw pension funds during her lifetime coupled with the transfer could be construed as a scheme to confer a benefit on the deceased’s sons. Ultimately, the majority held that the omission had already been decided upon whilst the funds were in the occupational pension fund and the sons could have benefitted from it without any move to the PPP. Therefore, the transfer “was not a contributory part of the scheme to confer gratuitous benefit on the sons” it was purely to prevent the husband from accessing the funds. The court held that the omission and transfer were not associated.

The final issue the court considered was whether Mrs Staveley’s omission to draw pension benefits during her lifetime was a transfer of value. The majority held that the omission did increase the value of the sons’ estates. The fact that a pension scheme administrator had a limited discretion as to distribute a death benefit to the sons was not sufficient to “[break] the chain connecting the two events…[and] the omission was the operative cause of the increase.” Therefore, a charge to tax would arise under section 3(3) as a result of the omission.

Dissenting judgment from Lord Hodge which Lord Sales agreed with

Lord Hodge agreed with the majority opinion on the transfer and the omission when taken separately. However, Lord Hodge argued that a scheme had arisen in relation to the transfer and the omission when taken together. Although Mrs Staveley intended to benefit her sons before transferring the funds to the PPP, Lord Hodge saw this as forming part of her motivation to transfer (i.e. her sole intention was not to prevent her husband accessing the funds). Lord Hodge therefore stated that the exception in section 10 IHTA should not apply to the “scheme” and this would attract an inheritance tax charge as well.

Conclusion

The case involves a detailed analysis of the circumstances in which pension fund transfers can attract an inheritance tax charge. The opinions of the majority and the minority of the Supreme Court also provide a close examination of the legislation relating to inheritance tax in the context of lifetime pension transfers. This is an important clarification for a complex area of law. The differing opinions of the judges suggests that the legislation is perhaps not clear enough in this area. It is also clear that for any future cases, the facts will be crucial in the court reaching a decision.