Revenue and Customs v Parry & Ors [2020] UKSC 35

Mrs Staveley transferred her pension into a personal pension plan shortly before her death and omitted to take lifetime benefits, leaving death benefits to her sons. HMRC sought inheritance tax on both. The Supreme Court held only the omission, not the transfer, was chargeable.

Facts

Mrs Staveley, following an acrimonious divorce from her ex-husband (with whom she had established Morayford Ltd), held a pension fund in a section 32 buyout policy. She was concerned that any surplus in the fund on her death might revert to Morayford and thus benefit her ex-husband. In November 2006, shortly before her death from cancer, she transferred the funds into a personal pension plan (PPP) and nominated her two sons to be considered by the scheme administrator for the death benefits. She never drew any lifetime pension benefits. Following her death in December 2006, the administrator exercised its discretion in the sons’ favour and paid the death benefits to them.

HMRC issued a Notice of Determination asserting inheritance tax (IHT) was payable on two transactions: (1) the transfer from the section 32 policy into the PPP, under section 3(1) IHTA 1984; and (2) Mrs Staveley’s omission to draw lifetime benefits, treated as a disposition under section 3(3) IHTA.

The First-tier Tribunal held the transfer was not a transfer of value (section 10 applied) but the omission was chargeable. The Upper Tribunal held neither was chargeable. The Court of Appeal held both were chargeable. The executors appealed to the Supreme Court.

Issues

The Supreme Court had to determine:

• Transfer Issue 1: Whether, viewed alone, the transfer of funds to the PPP was prevented from being a transfer of value by section 10(1) IHTA, on the basis that it was not intended to confer any gratuitous benefit.
• Transfer Issue 2: Whether, even if the transfer alone escaped section 3(1), it was nonetheless made in a “transaction” (including associated operations, as defined by section 268 IHTA) intended to confer gratuitous benefit, when taken with the omission to draw lifetime benefits.
• The Omission Issue: Whether, under section 3(3) IHTA, the sons’ estates were “increased by” Mrs Staveley’s omission to draw lifetime benefits, given that the payment depended on the scheme administrator’s discretion.

Arguments

Appellants (Executors)

The executors argued that the transfer was solely motivated by Mrs Staveley’s wish to sever ties with Morayford and prevent her ex-husband benefiting, and was not intended to confer gratuitous benefit. They contended the transfer and omission were not linked by common intent and therefore did not constitute a relevant series of transactions or associated operations under Macpherson. On section 3(3), they submitted there was no sufficient or immediate causal link between the omission and the increase in the sons’ estates because the administrator’s discretionary decision intervened.

HMRC

HMRC contended, relying on Lady Arden’s reasoning in the Court of Appeal, that section 10 required a technical legal analysis: the sons acquired newly created rights under the PPP that were different in law from their position under the will, and Mrs Staveley’s nomination demonstrated an intent to confer gratuitous benefit. On Transfer Issue 2, they argued the transfer and omission were associated operations forming part of a scheme to confer benefit. On section 3(3), they argued no temporal immediacy was required and the administrator’s limited discretion did not break the causal chain.

Judgment

Transfer Issue 1

The majority (Lady Black, with Lord Reed and Lord Kitchin agreeing; Lord Hodge and Lord Sales also agreeing on this issue) held section 10(1) applied to the transfer. Endorsing the approach of Newey LJ in the Court of Appeal, Lady Black held that “confer” and “benefit” must bear their ordinary meanings, importing the idea of granting or bestowing some advantage on the recipient. A disposition cannot be said to be intended to confer gratuitous benefit if the recipient is intended to receive no more than they would have received anyway. The Court rejected HMRC’s “return to zero” approach, which treated the sons as having nothing in the instant before the PPP rights were created, as artificial. While legal analysis of rights before and after the disposition is a relevant factor, it is not decisive.

Applying that test, the sons were not in any materially better position under the PPP than under the section 32/will arrangement: in both cases they had only a hope of benefit, subject to either Mrs Staveley’s decisions or the administrator’s discretion. The FTT’s finding that Mrs Staveley’s sole motive for the transfer was to sever ties with Morayford was upheld.

Transfer Issue 2

By majority (Lady Black, Lord Reed and Lord Kitchin; Lord Hodge and Lord Sales dissenting), the Supreme Court allowed the appeal. Analysing Macpherson, Lady Black held that while an associated operation need not itself be intended to confer gratuitous benefit, it must form a part of and contribute to a scheme which is intended to, and does, confer such a benefit. Crucially, the transfer and the omission were not relevantly linked. Mrs Staveley’s decision not to draw lifetime benefits had been taken while the funds remained in the section 32 policy, and her sons could have benefited from that scheme without any move to the PPP. The transfer contributed nothing to the scheme to confer benefit on the sons; it was a separate step taken solely to prevent Morayford benefiting. The FTT was entitled to find that the transfer and omission were not linked in Mrs Staveley’s mind.

Lord Hodge (with Lord Sales) dissented on Transfer Issue 2. He considered that Macpherson did not impose a test of necessity, and that the transfer and nomination, made when Mrs Staveley held a continuing intention to confer benefit on her sons via the death benefits, were referable to and a contributory part of a substituted scheme to enable them to receive those benefits.

Section 3(3) and the Omission

The Court unanimously dismissed the executors’ appeal. Section 3(3) imposes no temporal requirement of immediacy between the diminution of one estate and the increase of another. The evaluation of whether an estate “is increased by” an omission involves ordinary causation analysis on all facts and circumstances. The scheme administrator’s limited discretion did not break the chain of causation; the omission remained the operative cause of the increase in the sons’ estates. Furthermore, section 3(3) is concerned only with whether “another person’s estate” is increased, not the identity of that person, so it was clear from the date of death that a charge to tax would arise.

Implications

The decision provides important clarification of the operation of sections 3(3), 10 and 268 IHTA 1984, particularly in the pensions context.

On section 10

The Court confirmed that the question whether a disposition was intended to confer gratuitous benefit is to be answered by asking, broadly, whether the disposition was intended to improve the recipient’s position. An overly technical “return to zero” approach, focused solely on the creation of new legal rights, is rejected. Legal analysis of the rights is relevant context but not determinative; the practical reality and substance of the position must be considered.

On associated operations

The Court reaffirmed the limiting principle in Macpherson: not every operation falling within the wide definition in section 268 is relevant. To engage section 10, an associated operation must form part of and contribute to a scheme intended to confer gratuitous benefit. There must be a genuine link between the steps; operations driven by separate and independent motives will not be bundled together. The split decision on Transfer Issue 2, however, demonstrates that the application of this principle to mixed-motive transactions is fact-sensitive and contestable.

On section 3(3)

The decision is significant for IHT practice in relation to pensions. It confirms that an omission to draw lifetime pension benefits can trigger a deemed disposition under section 3(3) even where the ultimate receipt of death benefits depends on the exercise of a scheme administrator’s discretion and occurs after death. The existence of a genuine discretion does not automatically break the chain of causation. This clarifies a point of considerable practical importance for pension scheme members, trustees, administrators, and executors.

Wider significance

The judgment is of practical importance to tax practitioners, pension providers, and private client solicitors advising on estate planning involving pension arrangements. It delineates the boundary between legitimate pension planning that does not attract IHT and arrangements that will. The decision illustrates that the fact-finding of the First-tier Tribunal on intention is highly influential and that appellate courts should be cautious before disturbing such findings under Edwards v Bairstow principles.

Verdict: The appeal was allowed in part. The Supreme Court held that the transfer of funds from the section 32 policy into the personal pension plan was not a transfer of value, whether taken alone or together with the omission, because section 10 IHTA applied. However, the appeal was dismissed in relation to the omission: Mrs Staveley’s failure to draw lifetime benefits was a deemed disposition under section 3(3) IHTA and chargeable to inheritance tax. Lord Hodge and Lord Sales dissented in part, holding that the transfer taken with the omission should also have been chargeable.

Source: Revenue and Customs v Parry & Ors [2020] UKSC 35