Supreme Court rules on application of IHT to pension transfer and omission to take benefits

In its judgment in HMRC v Parry, the Supreme Court has held that a deceased member's omission to draw benefits from her pension scheme was a transfer of value for IHT purposes, but that her transfer from a "section 32 policy" to a personal pension scheme was not.

The key legislation in the case was section 3(3) of the Inheritance Tax Act 1984 (IHTA) which provides that where the deliberate omission to exercise a right results in the value of one person's estate being diminished and the value of another person's estate increased, the person who omits to exercise a right will be treated as having made a transfer of value for inheritance tax (IHT) purposes.  Section 10 of IHTA broadly provides that there is no transfer of value if it is shown that the transaction was not intended to confer a "gratuitous benefit" on another person. 

The background to the case was that the deceased member, Mrs Staveley, had divorced in 2000.  Prior to the divorce, Mrs Staveley and her husband had set up a company together, and Mrs Staveley had substantial pension rights in the company's occupational pension scheme. Following the divorce, Mrs Staveley transferred her pension rights to a "section 32 buy-out policy". Under the terms of the policy, any death benefit was payable to Mrs Staveley's estate.  The main beneficiaries of her estate would be her two sons.  Under the tax rules which applied pre-A-day, there was a surplus in the fund which could potentially be required to be paid to the company, thus benefiting her ex-husband.   Mrs Staveley was very strongly of the view that she wanted to avoid this, but she had no other option in relation to her pension fund at the time.

In 2006, Mrs Staveley was diagnosed as terminally ill.  In October 2006 (so after the post-A-day tax changes) she transferred her pension fund to a personal pension scheme under which any death benefit would be held on discretionary trusts.  Mrs Staveley nominated her two sons on an expression of wish form and, following her death in 2006, the death benefit was paid to them.  Evidence before the court indicated that Mrs Staveley's wish to ensure that her ex-husband did not benefit from her pension fund was an important factor in her decision-making (even though the practical effect of the A-day tax changes was to remove the chance of this happening).

The Supreme Court reached the unanimous decision that Mrs Staveley's omission to draw benefits from her pension fund during her lifetime, thus increasing the amount that her sons would receive on her death, amounted to a transfer of value giving rise to an IHT charge.  This was so even though the death benefits had been held on discretionary trusts and the scheme administrator had not been legally obliged to pay the death benefit to Mrs Staveley's sons.   By a majority judgment, it held that the transfer of funds to the personal pension scheme was not a transfer of value because it had not involved an intention by Mrs Staveley to confer a "gratuitous benefit" on her sons, meaning that the transfer fell within the exemption under section 10 if the IHTA.

Our thoughts

Since 6 April 2011, an omission to take pension rights under a registered pension scheme is not treated as a transfer of value for IHT purposes, so some aspects of the Supreme Court's judgment are now largely academic.  Nevertheless, the judgment could still be important in relation to transfers from section 32 policies, or where an omission to draw benefits falls outside the registered pension schemes exemption.  The fact that this case was the subject of decisions by two tax tribunals, the Court of Appeal and the Supreme Court, with the tribunals and courts reaching a range of different conclusions for different reasons, illustrates how complex the law in this area can be.

Permission to appeal granted in Adams v Options SIPP UK LLP (the Carey Pension case)

In May we reported on the judgment in Adams v Options SIPP UK LLP in which the High Court rejected a claim by scheme member Russell Adams that his SIPP provider Carey Pensions should compensate him for an investment in store pod leases which turned out to be worth only a fraction of what his SIPP paid for them.  The Court of Appeal has granted Russell Adams permission to appeal, with the appeal hearing listed for 2 March 2021.

FCA v Avacade Ltd: unauthorised introducers carried out regulated activity 

In the case of FCA v Avacade Ltd and others, the High Court ruled that various persons had breached the prohibition on carrying out regulated activities without the requisite FCA authorisation.  The FCA's proceedings related to a period between 2010 and 2014 during which Avacade contacted numerous  individuals by telephone who subsequently transferred their existing pension funds into SIPPs and purchased investments which included trees in Costa Rica and Malaysia and property development bonds.  According to the FCA, many of the investments subsequently failed.

One of the issues considered by the court was what constitutes the regulated activity of "Making arrangements with a view to a person who participates in the arrangements buying, selling or subscribing for… investments".  The court rejected the argument that the activity only applied to providing support or assistance to both parties to the transaction.  The court identified five steps taken by Avacade (including the initial contact about obtaining information about an individual's pension arrangements, completing application forms concerning SIPP transfers and investments, and processing application forms) that it considered collectively amounted to "arrangements" undertaken "with a view to" a transaction coming about.  It rejected arguments that each of those steps should be considered separately for the purpose of considering whether exclusions from the regulated activity applied.

The court also considered the meaning of the exemption from the authorisation requirement where "the introduction is made with a view to the provision of independent advice or the independent exercise of discretion in relation to investments generally…"  It rejected the argument that this exemption could apply where advice was provided in relation to one investment option only.  It also rejected the argument that the discretion of the SIPP provider to refuse to act on investment instructions in certain circumstances amounted to the "independent exercise of discretion" contemplated by the exemption.

Following the court's ruling, the FCA issued a press release announcing that it would be seeking orders requiring the defendants in the case (who included the individual directors of the companies concerned) to pay restitution for their roles in the unlawful activity.

The High Court judge in the case refused permission to appeal, but it has been reported that at least one of the defendants intends to apply to the Court of Appeal for permission to appeal.

Data protection: court considers when to decline a DSAR order

The court's judgment in the recent case of Lees v Lloyds Bank PLC gives an indication of the courts' likely approach when faced with someone making a data subject access request (DSAR) for the purposes of furthering a dispute or simply for the purpose of making work for the recipient.  It suggests that the courts may be reluctant to make an order against the DSAR recipient in such circumstances. 

The case involved a claimant who became involved in a dispute with the Bank after the Bank sought possession of three properties in relation to which he had taken out buy to let mortgages.  Orders for possession of the properties had already been made in separate court proceedings in which the claimant had exhausted his rights of appeal.  The claimant had made a number of court applications which had been dismissed as totally without merit.  The claimant also brought proceedings alleging that the Bank had failed to comply with a number of DSARs which he had made.  The judge held that the Bank had adequately responded to the DSARs, but went on to consider whether it would have exercised its discretion to make an order in favour of the claimant had the Bank not complied.  The judge said that he would have declined to make an order in the light of:

• the issue of numerous and repetitive DSARs which was abusive;
• the real purpose of the DSARs being to obtain documents rather than personal data;
• there being a "collateral purpose" which lay behind the request which was to obtain assistance in preventing the Bank bringing claims for possession.  (The judge made clear that a collateral purpose would not always mean the court would make no order, but it was a relevant factor in the exercise of the court's discretion);
• the fact that the data sought by the claimant would be of no benefit to him (because even if it proved the state of affairs which the claimant was alleging, that would still be legally irrelevant to the legal proceedings which had prompted the claimant to make the DSAR);
• because the Bank's claim to possession of the properties, which the claimant was seeking to overturn, had already been determined by previous court proceedings in which all avenues of appeal had been exhausted.

Our thoughts

DSARs can be problematic for SIPP and SSAS businesses if they are being used as a tool in a dispute or as a way of making work for the business on the receiving end.  The comments in this case are welcome news as they suggest that the courts are likely to be sympathetic to businesses who find themselves on the receiving end of DSARs in such circumstances.

Court sanctions transfer of SIPP business alongside transfer of insurance business

The High Court has sanctioned the transfer of part of Legal & General's insurance business to Reassure Limited under its powers under the Financial Services and Markets Act 2000.  The transfer relates to a strategic decision by Legal & General (L&G) to dispose of its traditional insurance-based savings, pensions, life and with profits business.  Under the relevant legislation, before sanctioning a transfer of insurance business, the court must consider that it is appropriate in all the circumstance of the case.

The judgment in this case was the subject of particular attention following the High Court's recent refusal (currently the subject of an appeal) to sanction a transfer from the Prudential to Rothesay Life.  In the L&G case, the judge held that there were significant differences from the Prudential case.  One of the most important differences was that for the vast majority of policies being transferred from L&G, the policyholder had the choice of changing provider.

The transfer of the business involved the transfer of approximately 7000 SIPPs.  The judge noted that this involved particular complexities.  Although from the customer's perspective, a SIPP was a single product, its operation involved contractual and trust arrangements between various companies in the L&G group.  

The judge noted that some parts of the SIPP business clearly constituted insurance business, for example where SIPP members had invested in insurance assets.  Where SIPP members had invested in self-invested assets, it was doubtful that this constituted insurance business.  However, the evidence suggested that there would be considerable practical difficulties in disentangling, at the custodian and fund manager level, the SIPPs which held only self-invested assets and those that held mixed assets.  Moreover, if the whole SIPP business was not transferred, this could result in SIPP members who had purchased a single product finding that it was divided into separate elements between two different providers.  The judge therefore held that it was appropriate for the whole SIPP business to be transferred to Reassure.

CJEU ruling on standard contractual clauses and EU/US privacy shield

In its "Schrems II" judgment on data protection issues, the Court of Justice of the European Union (CJEU) has ruled that the EU Commission's decision on controller to processor standard contractual clauses is valid, but that the Commission's decision on the adequacy of the protection provided by the EU-US Privacy Shield is invalid.  

The GDPR requires that where personal data is being transferred outside of the UK and EU, unless the European Commission has decided through an "adequacy decision" that the country to which data is transferred has adequate data protection principles enshrined its law, the data controller must ensure that appropriate data protection safeguards are in place.  The EU-US privacy shield is an arrangement which imposes stronger obligations on US companies to protect the personal data of EU citizens and includes written commitments and assurances from the US regarding data protection measures. However, the CJEU has held that the EU Commission's decision that the EU-US privacy shield provided adequate protection was invalid.

Another way of providing for appropriate safeguards is through the use of standard contractual clauses adopted or approved by the Commission.  There are different types of clauses for different situations.  The Schrems II decision related to "controller to processor" clauses.  The CJEU held the Commission's decision approving controller to processor standard contractual clauses was valid, but that it is still necessary for data controllers making transfers to consider whether the clauses provide an adequate level of protection for the transfer in question.

The CJEU's decision is potentially relevant to any pension providers who transfer personal data to the US who will need to consider whether their legal basis for transferring data outside the UK to a non-EU country remains valid.  Where standard contractual clauses are relied on, pension providers need to consider whether an adequate level of protection is provided.