Pension transfers - death within 2 years (IHT)

I've seen recently that if someone dies within 2 years of a pension transfer/switch they could be assessable to IHT if they knew they had a short life expectancy, and this scenario has been the subject of a landmark case, upheld by the Court of Appeal, who ruled in favour of HMRC (Revenue And Customs v Representatives of Staveley (deceased) [2017])

This was where the member wanted to leave the death benefits to her sons and didn't want her ex-husband to benefit in any way from the pension.

I assume though that the spousal exemption on transfers would apply (ie if she had nominated her husband as the beneficiary)?


  • The IHT issue arises on death within 2 years irrespective of the cause of death; so applies if you get run over by a bus whilst being otherwise very fit and healthy.

    This 2 year rule is a long-standing one and the Stavely case is just one example of where HMRC has sought to enforce it.

    I agree that spousal exemption would apply; you look at the death benefit as an asset of the estate and then where it is paid to asses IHT liability.

  • This is only relevant though when the transfer is from DB to DC and old RACs to new PPs, right?

  • Aron, I believe you are correct, that was my understanding.

  • The issue is in respect of ANY action (transfer, contribution...) taken in respect of any pension within 2 years of death (and such action includes a decision to defer taking benefits).

    Whether there is a loss to the estate as a result of that action is a secondary question to determine if an IHT liability arises.

    In the FTT adjudication in Staveley, there was a "hope" (my word) that HMRC would take a pragmatic approach on a switch from one pension provider to another. But this may not be the case, particularly if such a move is done post 55 and as an alternative, the pension member could have taken benefits.

    The IHT400 asks "Did the deceased have any provision for retirement other than the State Pension? For example, a pension from an employer, a personal pension policy (or an alternatively secured pension)"

    The IHT409 asks, amongst others:
    "Did the deceased, within the 2 years before they died, transfer or dispose of any benefits payable under a pension scheme or personal pension policy?"
    "Did the deceased, within the 2 years before they died, make any changes to the benefits to which they were
    entitled under a pension scheme or personal pension policy?"

    Pensions are not (& never have been) IHT free. They are "normally" IHT free.

  • The spouse's exemption doesn't apply. It is a transfer to a pension scheme with discretionary power over who can benefit. Therefore, it will eat into the NRB and potentially create a retrospective tax charge if the value of the loss to the estate (which isn't automatically the same as the transfer value) is more than the available NRB when all the calculations are completed on death. .

    Worth noting that Staveley was originally ruled against HMRC and the January 2017 ruling is interesting and definitely worth reading. I hadn't realised it was going to appeal until the publicity of it being overturned hit the trade press. It was a very specific set of circumstances and I'm surprised that the compelling arguments in the Jan 17 ruling were successful at appeal.

    Benjamin Fabi FPFS
    Chartered Financial Planner 
  • Ben's point re spouse exemption corrects my previous (poorly thought through) comment - as always he brings clarity to a murky world!!

    Reading the FTT , UTT & Appeal Court adjudications on Staveley is very enlightening.

    The amount transferred was £405,000 and HMRC argued on both the transfer and the omission to take benefits.

    To me, what I find astonishing is that the adviser in respect of the transfer was not pursued as the issue the client had with their Section 32 was resolved by the changes in pension legislation in April 2006. There was no need to transfer. The stated reason for pursuing the transfer was "This is new legislation and may be challenged by your former husband".

    I'd have loved to see that legal challenge!! I suspect any sensible legal adviser would have run a mile from pursuing that one.

    The S32 to PP transfer was for over £500k. The cynic in me can't help wondering what influence a contingent fee payment had on the advice?

    Furthermore, given there was a FTT, and UTT and then Court of Appeal I wonder what the Appellants legal bill is and how this compares with the attempt to save £140k in IHT?

    What is also interesting (form a planning perspective) is the omission to take benefits. The FTT discussed that a scheme NRD was not really relevant; it was more a case of when benefits can be taken.

    If we are now more readily proposing clients spend non pension money before pension money to improve the IHT position and increase values cascading down the generations are we likely to see an increase in omission cases brought by HMRC.

    How then, should we draft the advice to 'defend' such an omission attack?

    I am merely "thinking out loud" on this at the moment; I may be over thinking it, or maybe not?

    One further thought. Mrs Staveley dies in 2006. This has taken 12 years to resolve!!

    The Court of Appeal Judgement can be found at

  • Thanks Richard, and I apologise for doing it again but I have it in my head that the 'omission to act' situation is no longer available to hmrc. I'll have a look later and provide a better reference than my dim recollection of a case I did earlier in the year!
    Benjamin Fabi FPFS
    Chartered Financial Planner 
  • Hi Ben, Suspect you are right but with HMRC you never know how they may try to "wriggle".
    Its the second question on the IHT 409 which concerns me a little as it is worded about making changes to benefits; would this include an effective alteration in an NRD? Possibly not given the arguments over that in Staveley. Does changing the investment strategy come into this if it were to move to something more for the appropriateness of a future beneficiary?
    Probably getting way too worried about stuff that doesn't exist - its the Brexit debacle ding my head in!!!

  • This is a paragraph taken from

    Section 3(3)
    The other matter the tribunal had to deal with was the omission to exercise a right. Before looking at the arguments it is worth stressing that this particular issue is now only of historical interest because, since FA 2011, the omission to exercise a right rule in s 3(3) is no longer relevant to registered pension plans (see IHTA 1984, s 12(2ZA) and s 12A).

    Benjamin Fabi FPFS
    Chartered Financial Planner 
  • Ben, Thank you re Omission.

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