The Supreme Court has partially allowed an appeal in a case centred around inheritance tax (IHT) charges following a pension transfer and omission of drawing pension benefits.

The appellants were executors of Mrs Staveley’s estate, who brought the case to the Supreme Court after the Court of Appeal had ruled that IHT was payable on both the transfer of her funds into a personal pension and her omission to draw her pension benefits before her death.

Its decision finds that a defined contribution (DC) pension transfer made within two years of death should not be subject to IHT, ruling that the appellants should not be subject to IHT on the transfer.

However, it ruled that IHT should be payable on the omission to draw pension benefits.

Mrs Staveley and her then husband set up a company, with which Mrs Staveley had an occupational pension.

When the couple divorced, Mrs Staveley transferred her funds into a personal pension, which was motivated by her desire to ensure that her ex-husband did not benefit from the return to the company of any surplus in the fund.

She did not take any pension benefits during her life and nominated her two sons, the executors of her estate, as beneficiaries of the death benefit payable under the personal pension.

HMRC determined that IHT was due on the death benefit, on the basis that both the transfer of funds and her omission to draw any benefits before her death in December 2006 were lifetime transfers of value within section three of the IHT Act 1984.

The case has divided several courts. The First-tier Tribunal judged that the IHT was due on the omission but not the transfer, the Upper Tribunal found that no IHT was payable on either transaction, while the Court of Appeal held that both the transfer and omission required IHT payments.

By a majority of three to two, the Supreme Court ruled that the omission to claim benefits gave rise to an IHT charge, but the transfer did not.

Royal London head of intermediary development and technical, Clare Moffat, said that the decision “clarified that intention is crucial when a pension transfer or switch is made in terminal ill health”.

She continued: “Where there is an intention to give benefits which didn’t exist before, such as a DB to DC transfer, it will be subject to IHT.

“But a discretionary DC to DC switch may be completed without worry of IHT if it is for genuine commercial reasons and the beneficiaries on the expression of wish form stay the same.”

Curtis Banks pension technical manager, Jessica List, stated that the judgments changing at every stage showed “what a highly contentious issue this has been”.

“It’s hugely reassuring for the industry that the transfer itself has been found not to create an IHT liability, for reasons which would seem to set a precedent for other similar cases,” she added.

AJ Bell senior analyst, Tom Selby, said that the case had "exposed the complexity and confusion" around pensions and IHT, and the government should address this with the "common sense solution" of removing pensions from IHT altogether.

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