Omission to exercise rights to take lifetime pension benefits was a transfer of value

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The transfer of funds from one pension policy to another and a deceased individual’s omission to take lifetime pension benefits were held to be treated as transfers of value for inheritance tax purposes.

The deceased (RFS) was diagnosed with cancer, and in October 2006 was advised that her prognosis was terminal. On 3 November 2006, RFS applied for the funds from one pension scheme (‘section 32 policy’) to be transferred into another (‘AXA PPP’). She completed an expression of wishes requesting that the death benefits be paid equally to her two sons. The AXA PPP commenced on 9 November 2006. Although the terms of the policy entitled RFS to access lifetime benefits, she did not do so. RFS died on 18 December 2006.

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HM Revenue and Customs (HMRC) issued inheritance tax determinations in respect of two alleged lifetime transfers of value by RFS, arising firstly out of the transfer by RFS of funds out of the section 32 policy into the AXA PPP, and secondly the omission by RFS during her lifetime to take any lifetime benefits from the AXA PPP. The deceased’s personal representatives (PRs) and beneficiaries of the death benefit paid out of the AXA PPP appealed.

The First-tier Tribunal (FTT) ([2014] UKFTT 419 (TC)) allowed the appeals in respect of the transfer of funds to the AXA PPP but dismissed the appeal in respect of the omission by RFS to take lifetime benefits. HMRC appealed to the Upper Tribunal (UT) on the first issue; the personal representatives (PR) and beneficiaries cross-appealed on the second issue. The UT ([2017] UKUT 4 (TCC)) dismissed HMRC’s appeal and allowed the PRs’ and beneficiaries’ cross-appeal. HMRC appealed.

On the first issue (i.e. whether the UT were correct to hold that the exemption in IHTA 1984, s 10 applied to the transfer), the Court of Appeal concluded that HMRC’s appeal should succeed in relation to the question of whether a gratuitous benefit was conferred, and also that there was an associated operation forming an integral part of the transfer (i.e. the omission to draw the income under the PPP).

On the second issue (i.e. whether RFS’s omission to exercise her right to take income benefits from the PPP after the transfer and before her death should be treated as a transfer of value under IHTA 1984, s 3(3)), the court concluded that the sons' estates were increased by the omission by RFS to take the income benefits following the transfer to the PPP and up to the last moment before her death. HMRC therefore also succeeded on this issue. HMRC’s appeal was allowed.

Revenue and Customs v Parry & Ors [2018] EWCA Civ 2266