The Supreme Court has ruled a pension transfer made in ill health was not liable for inheritance tax in a landmark case coming to a close after six years.

In its final judgment in the Commissioners for Her Majesty’s Revenue and Customs v Parry & Ors case, better known as the Staveley case, the Supreme Court ruled HMRC was not right to charge IHT on the claimant’s pension transfer, though it was right to charge it on what HMRC deemed an ‘omission of benefits’.

Industry experts expect the ruling to set a precedent for ill-health transfers going forward.

The case involves a Ms Staveley who, after an acrimonious divorce, transferred a portion of a pension she had set up with her husband into a new pot and bequeathed it to her children. She died a few weeks later.

Because the woman was terminally ill, HM Revenue & Customs treated the transfer as a “chargeable lifetime transfer” followed by an “omission to act” as she did not draw any benefits, and applied IHT.

It argued the two actions were linked and designed to reduce the value of her estate for IHT purposes. But the woman’s estate argued the transfer was exempt because it was not meant to confer a “gratuitous benefit”.

Under current rules, anyone who is in ill-health, transfers their pension and then dies within two years could see their remaining pot hit with a 40 per cent tax charge.

An HMRC spokesperson said: “We are pleased that the Supreme Court upheld HMRC’s view of the tax rules in this case and are carefully considering the implications of this decision.”

Tom Selby, senior analyst at AJ Bell, said: “After years of wrangling in the courts this ruling finally brings some certainty to people who transfer their pensions while in ill-health.

“This protracted case has exposed the complexity and confusion that exists around pensions and IHT. Research has exposed a gaping lack of understanding when it comes to gifting and IHT, and this is even more pronounced when pensions are thrown into the mix.

“It is within the gift of politicians to address this confusion, and the common-sense solution to this complexity would be to remove pensions from IHT altogether.”