Under the terms of her divorce settlement, Mrs Staveley (the deceased) received a share of a company pension scheme. She was advised that her only option was to transfer this to a ‘s32 buyout’ policy. Under this policy funds could revert to the company which would potentially benefit her ex-husband. The divorce had been acrimonious and she desperately wanted to avoid that happening. However, it became apparent that the s32 policy was her only option and in July 2000 she transferred her fund of £571,715 to the s32 policy. Evidence demonstrated that the deceased remained unhappy with this situation throughout the term of the policy. Under the policy, any death benefits would be paid to her personal representatives.
In December 2004 the deceased was diagnosed with cancer, prompting her to make a will which left everything equally between her two sons (the second and third appellant). She subsequently went into remission; however, by 2006 she had relapsed and she was told that her condition was terminal. The deceased sought and received advice on accessing the lifetime benefits under her s32 policy. Again, when seeking this advice, her primary concern was to avoid her ex-husband benefiting from her fund. The recommendation received was not to take the lifetime benefits. Due to a change in legislation, she was also advised that she could now transfer her pension to a personal pension plan (PPP), which would avoid the risk of her ex-husband benefiting from it. No inheritance tax (IHT) planning advice was sought, although she was told that the PPP would allow her death benefits to be paid out under a discretion which meant the funds would pass free of IHT.
In October 2006 the deceased determined not to access her s32 policy fund. The transfer to the PPP was undertaken on 9 November 2006. She also signed a letter of wishes nominating her sons as the beneficiaries of her death benefits. She did not access the lifetime benefits under the PPP. The deceased died on 18 December 2006 aged 56.
On 20 April 2012 HMRC served the appellants (as executors of her estate) with two notices of determination assessing them to inheritance tax on two alleged transfers of value made by the deceased:
- 1) The transfer from the s32 policy to the PPP;
- 2) The omission by the deceased to take any lifetime benefits under the PPP.
The appellants appealed both notices. In relation to the first notice, they considered that although the transfer to the PPP was a disposition it was not a transfer of value within the meaning of s3 of the Inheritance Tax Act 1984 (IHTA) because the exemption in s10(1) IHTA applied. This exemption prevented a disposition being a transfer of value where it could be shown that the disposition:
- 1) Was not intended and was not made in a transaction intended, to confer any gratuitous benefit on any person; and either
- a) it was made in a transaction at arm’s length between unconnected persons; or
- b) it was such as might be expected to be made in a transaction at arm’s length between persons not connected with each other.
As to the second notice, the parties accepted that under the terms of both schemes, the deceased had a right to take life time pension benefits. She had not exercised these rights which resulted in the pension trustees exercising their discretion and paying death benefits to her sons. This unexercised right had a value to her estate immediately before her death. The appellants argued that the omission to take pension benefits was not, however, a disposition within s3(1) IHTA as it was not caught by s3(3). This required:
- a) the decrease in value of the deceased’s estate to be causally linked with the increase in value of another’s estate; and
- b) the omission by the deceased to be deliberate.
The appellants considered that the causal link required at (a) was absent. While the omission decreased the deceased’s estate, it did not increase anyone else’s. It was only when the pension trustees exercised their discretion that the deceased’s sons’ estates were increased.
As to the intention required at (b), the deceased’s omission was not deliberate for a number of reasons:
- i) She had not reached the normal retirement age specified in either policy (61-65 years);
- ii) Placing reliance on Dymond, the deceased’s omission should be treated as taking place at the last possible moment on which she could have elected to take the lifetime benefits. This was the moment before death. At this point, she was too ill to take any decision;
- iii) The deceased’s omission was inadvertent as her only concern had been to ensure her ex-husband did not receive any benefit. By the start of the PPP in November 2006 there was no positive decision by her not to take the benefits;
- iv) Evidence demonstrated that so far as the deceased did make a decision on taking the lifetime benefits, her greatest concern was maximising her long-term financial interests, despite her prognosis.
Held (allowing the appeal in part):
- 1) As to the first notice, from the evidence provided it was clear that the deceased’s key reason for the transfer of the s32 policy to the PPP was to ensure that no funds reverted to her ex-husband in the event of her death. There was no evidence to suggest that this decision was IHT-driven.
- 2) The deceased’s letter of wishes could not properly be described as an intention to confer gratuitous benefit. Her sons were the beneficiaries of her will and had stood to benefit under the s32 policy. This transfer did not then confer a benefit which was new to them. The whole premise of s10 IHTA required that a new benefit, that did not exist before, be conferred.
- 3) As the letter of wishes was between the deceased and AXA and it did not automatically confer any rights on those named within it (the exercise of discretion was required), the transaction between the deceased and AXA was therefore at arm’s length and between unconnected parties.
- 4) The appeal was upheld in respect of the first notice. The transfer to the PPP was not a transfer of value within s3 IHTA as it came within the exception in s10 IHTA.
- 5) As to the second notice, considering the causal link, the tribunal determined that s3(3) did not require the increase in one estate and decrease in another to occur at exactly he same moment or be in the same amount, although both must be caused by the same omission. The cause of the sons’ receipt of cash was, firstly, the omission by their mother to take the lifetime benefits and, secondly, the exercise of discretion by the pension trustees. Ordinarily, the exercise of discretion would break the chain of causation, but it is common knowledge that pension trustees normally follow a deceased’s letter of wishes. The deceased had every reason to expect the trustees to follow her wishes and therefore the exercise of discretion did not break the causal link.
- 6) As to whether the deceased’s actions were deliberate, and considering the appellants arguments in turn, it was determined that the normal retirement age and whether the deceased had reached it had no relevance here. Furthermore, her incapacity on death and her reason for the transfer to the PPP did not matter as she had already taken a positive decision not to access her lifetime benefits in October 2006 and nothing had changed. As to the appellants’ final proposition, this assumed that the reason for the omission was relevant. However, there is nothing express in s3(3) IHTA to require that. The reason for the omission does not make the omission any less deliberate. This argument was also dismissed.
- 7) At least one of the reasons leading the deceased to not take the lifetime benefits was to ensure that the amount which her sons would receive was maximised. This could not be ignored and while this was only part of her decision in not taking the benefits prior to her death, it was a deliberate intention. Section 10 IHTA could not be applied.
- 8) The appeal in relation to the second notice was dismissed.
- 9) Quantum to be agreed between the parties.