Pensions: Inheritance tax, transfer of value, associated operations
HMRC v Parry, Piney and Staveley  UK UT 4
The deceased held a pension derived from a company pension scheme, and decided to transfer her funds from that pension to another pension provider. She further decided, once the new pension had been set up, not to take any lifetime benefits from it. When she died soon after, her estate was charged inheritance tax (IHT) on two lifetime transfers of value, first on the transfer of the funds and secondly on the omission to take any lifetime benefits.
The deceased, Mrs Staveley, had a pension (the ‘s.32 policy’) derived from a company pension scheme established by a company, Morayford, set up by her and her ex-husband. The transfer to the s.32 policy was made after an acrimonious divorce, and Mrs Staveley understood that (a) she would not be permitted to transfer the funds to a private pension scheme for 10 years, and (b) any surplus in the s.32 policy would be returned to Morayford.
Mrs Staveley was very concerned about the possible reversion of pension funds to the company, and that it might, in whole or in part, benefit her ex-husband. The First-Tier Tribunal rejected, however, the assertion that she would rather her sons receive nothing than have her ex-husband benefit in any way. She sought advice in relation to her pension at regular intervals, and in 2004 was advised that a change in the law meant that from April 2006 she would be able to transfer the funds to a private pension without waiting for the 10 year period to expire. She was also advised that the legislation provided for the whole of the s.32 policy to go to her beneficiaries, not revert in any part to Morayford. The advice was, however, tempered by a note that the legislation was as yet untested, and to remove all concerns about funds reverting she could transfer them to a private pension and sever all connections with the company.
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On 30 October 2006 Mrs Staveley signed a request for the funds from the s.32 policy to be transferred to a private pension. On 3 November she applied for the funds to be transferred to an AXA PPP. As part of that application she completed an expression of wishes form requesting that the death benefits be paid equally to her two sons. The AXA PPP commenced on 9 November 2006, and Mrs Staveley did not access any lifetime benefits. She died just over a month later, on 18 December 2006.
In mid-June 2007 the AXA PPP administrator exercised its discretion and paid the lump sum death benefit to her two sons (Mr Piney and Mr Staveley) in equal shares.
IHT is charged on the value transferred by a chargeable transfer made by an individual (IHTA 1984 ss1-2). For the purposes of this case, the wording of s.3 IHTA was significant:
“(1)…a transfer of value is a disposition made by a person…as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer.
(3) Where the value of a person’s estate is diminished, and the value—(a) of another person’s estate…is increased by the first-mentioned person’s omission to exercise a right, he shall be treated for the purposes of this section as having made a disposition at the time (or latest time) when he could have exercised the right, unless it is shown that the omission was not deliberate…”
S.10 IHTA then states:
“(1) A disposition is not a transfer of value if it is shown that it was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person and either—
(a) that it was made in a transaction at arm’s length between persons not connected with each other, or
(b) that it was such as might be expected to be made in a transaction at arm’s length between persons not connected with each other.
(3) In this section—
‘disposition’ includes anything treated as a disposition by virtue of section 3(3) above;
‘transaction’ includes a series of transactions and any associated operations.”
Finally, s.268 IHTA defines ‘associated operations’:
“(1) In this Act ‘associated operations’ means…any two or more operations of any kind, being—
(a) operations which affect the same property, or one of which affects some property and the other or others of which affect property which represents, whether directly or indirectly, that property, or income arising from that property, or any property representing accumulations of any such income, or
(b) any two operations of which one is effected with reference to the other, or with a view to enabling the other to be effected or facilitating its being effected, and any further operations having a like relation to any of those two, and so on,
whether those operations are effected by the same person or different persons, and whether or not they are simultaneous; and ‘operation’ includes an omission.”
The first issue considered was whether the transfer from the s.32 policy to the AXA PPP was a transfer of value.
It was common ground that the transfer of the s.32 policy fund was a disposition for the purposes of s.2 IHTA and that it gave rise to a diminution in the value of Mrs Staveley’s estate, being property over which she had a general power of disposition. The transfer was therefore a transfer of value for IHT purposes unless it fell within s.10 IHTA, and it would have to meet the gratuitous benefit provisions and the arm’s length transaction provisions of that section.
The FTT had found that the transfer of the funds from the s.32 policy was not intended to confer any gratuitous benefit on any person. It held that Mrs Staveley’s sole motive in making the transfer was to exclude the possibility of her ex-husband benefitting. That finding could be understood as finding that, but for that risk, Mrs Staveley would not have made the transfer, but would have allowed the status quo to endure, and for her sons to benefit, as she had planned, under her will. The FTT had therefore been entitled on the evidence to find that the disposition of the s.32 policy funds was not intended to confer gratuitous benefit on any person.
Next the judges concluded that the debate on the meaning of transactions or series of transactions was ‘sterile’ in relation to the facts of this case. The real question was whether the transfer of the s.32 policy funds was part of a transaction including associated operations, and whether that extended transaction was intended to confer a gratuitous benefit. HMRC argued that the FTT’s findings in relation to the omission to take lifetime benefits from the AXA PPP necessarily led to the conclusion that the omission was an associated operation with the transfer to the AXA PPP, within s.268(1)(a) IHTA, as they were both operations that affected the same property.
The judges noted:
“It was not suggested in this case that Mrs Staveley had entered into a scheme to avoid or reduce inheritance tax. But it is equally clear that, where it is relevant, s.268 can apply to ordinary cases where no avoidance is involved.”
One needed to consider whether an operation, if it did not itself confer a benefit, must at least objectively from part of and contribute to a scheme that does. But, the judges noted, there was also a subjective element which is not limited to the discrete elements of the scheme — the scheme, comprising all its elements, must also be intended to confer the benefit. In this case, the necessary intention must be shown for the combination of the transfer to the AXA PPP and the omission to take lifetime benefits. As the FTT had found there was no common intention with respect to the transfer and the omission that was sufficient for the transfer not to be an associated operation with the omission. The transfer, and the motivation for it, were found to be entirely separate from the omission to take lifetime pension benefits, and any intention in that respect. “Even if the omission had been intended to confer a gratuitous benefit, the transfer was not part of any scheme with the omission which had that collective intention”. Therefore, The FTT’s finding that the transfer and omission were not associated operations was correct.
The final point in relation to the transfer of the s.32 policy funds was whether the transaction was, in the terms of s.10 IHTA, made at arm’s length between persons not connected with each other. The judges believed the answer to this was straightforward. Once the FTT had determined that the transfer in question is the transfer to the AXA PPP, including the surrender of the s.32 policy and related expression of wishes, and that it did not extend to the omission to take lifetime benefits, it was clear the parties were unconnected. The presence of reference to connected persons did not prevent the test in s.268(1)(a) from being met.
“The relevant test is whether the transaction, as identified, is ‘between’ unconnected persons. That is the critical link. In this case, although Mrs Staveley’s two sons were named in the expression of wishes, it could not be said that any part of the relevant transaction was between Mrs Staveley and her sons…”
The UT judges therefore concluded that they agreed with the FTT: it had been shown that the disposition by the transfer of funds to the AXA PPP was not intended, and was not made in a transaction intended, to confer gratuitous benefit on any person, and that it was made in an arm’s length transaction between unconnected persons.
The second issue to be considered was if the omission to exercise a right to take lifetime pension benefits was a transfer of value for IHT purposes.
There was no challenge in the appeal to the finding that Mrs Staveley’s omission to take lifetime benefits was deliberate. The appeal was on the basis that the omission did not satisfy the requirements of s.3(3) to amount to a disposition. There was again no dispute that the value of Mrs Staveley’s estate was diminished by the omission. The appeal concerned the FTT’s finding that the value of another person’s estate was increased by that omission.
The first argument made was that the diminution of the estate and the increase in the other person’s estate must take place at the same time. The UT dealt with this point in short order, concluding that, “The legislation does not support a requirement that there must be a see-saw effect of simultaneous diminution and increase in value.”
The second argument brought was that both the diminution in the value of the estate of the person omitting to exercise the right and the increase in value of the other person’s estate must be caused by the omission. The judges agreed with the FTT’s finding, in the absence of an evidence of a sham, that there was a genuine exercise of discretion by the scheme administrator, and the most Mrs Staveley could have expected from her completion of the expression of wishes was that a diligent administrator would take those wishes into account as a relevant factor in the exercise of its discretion.
The judges held that an effective intervening event without which the person’s estate would not be increased will in most cases be sufficient to break the necessary causative link with the original omission. In their view, in the present case, the scheme administrator’s exercise of its genuine discretion was clearly the “immediate and proximate cause” of the increase in the sons’ estates, and a sufficient to break the chain of causation.
HMRC had argued in the appeal that it s.3(3) applied even where the increase in question is not of an estate of an identifiable person— however the scheme administrator exercised its discretion, there would be an increase in the value of some person’s estate. The judges did not accept this argument. By the wording of s.3(3) what was required was that there is an increase in another person’s estate.
“It must be accordingly be possible to identify, by reference to the required causal link, a particular estate or estates that has or have been increased by the omission.”
The judges held that the FTT made an error of law in deciding that the discretion of the scheme administrator did not break the chain of causation. In their judgement, it was the exercise by the scheme administrator of its discretion that was the proximate cause of the increase in the sons’ estates, not Mrs Staveley’s omission to exercise her right to take lifetime benefits.
A large number of clients will have now have private pensions, rather than company ones. Questions of how they are managed and whether they bring about ‘transfers of value’ for IHT purposes are therefore likely to increase in number.
Practitioners should be prepared to look closely at the reasons for clients taking particular actions. Common intention re potentially related operations will be significant.
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