Sons defeat inheritance tax bill on mother’s pension death benefits

In a case that will be required reading for tax planning professionals, a tribunal has ruled that a cancer victim’s sons were entitled to receive the death benefits payable on her personal pension plan (PPP) free from Inheritance Tax (IHT).

The woman had founded a company with her husband and, after their acrimonious divorce, was anxious to ensure that he did not benefit from her share of the company pension scheme. Shortly before she succumbed to ovarian cancer, she transferred her benefits under that scheme to a PPP. The administrator of the PPP transferred death benefits arising to her two sons following her death.

HM Revenue and Customs (HMRC) raised IHT demands against the sons and the personal representatives of the woman’s estate on the basis that the transfer of benefits from the scheme to the PPP was a lifetime transfer of value. There was no dispute that the transfer was a disposition for the purposes of the Inheritance Tax Act 1984 and that it had diminished the value of the woman’s estate.

In ruling on the dispute, the First-tier Tribunal (FTT) found that the transfer had not been intended to confer any gratuitous benefit on any person, in particular the sons. The woman’s motive in executing the transfer was to ensure that her surplus pension funds did not revert to the company on her death, thus benefiting her ex-husband.

In rejecting HMRC’s challenge to that decision, the Upper Tribunal (UT) found that the transfer was an arm’s length transaction between unconnected persons and that, on the evidence, the woman’s sole motive in executing the transfer was to sever ties with her ex-husband and not to confer a gratuitous benefit on her sons.

The FTT had also ruled that the woman’s omission to take any lifetime benefit from the scheme or the PPP did amount to a taxable transfer of value. However, in upholding the sons’ challenge to that decision, the UT noted that the administrator of the PPP had a discretion as to who should receive the relevant death benefits. It was the exercise of that discretion, rather than the woman’s omission to take lifetime benefits, that was the proximate cause of the increase in value of the sons’ estates.