Johnathan Crowther dicusses the outcome of a court case that determined whether IHT was payable on a trust property where on interest was held
A previous article in the Easy guide to... series looked at the layered structure of tax law and maintained that it was essential to "drill down" through the law "from the top" rather than applying sections on an ad hoc basis to transactions.
An anti-avoidance section does not apply per se like a charging section, but instead only applies if someone falls within the section to which the anti-avoidance rule applies. The scheme in the Eversden case determines the difference between exclusion and exception.
the case of mrs eversden
Mrs Eversden owned 100% of the family home. She settled a 95% interest in the home on a life interest trust for her husband. She continued to live in the home with her husband and on the husband's death the trust became discretionary for a period of 80 years and included Mrs Eversden as a discretionary beneficiary.
The year after her husband died, Mrs Eversden and the trustees disposed of their interests in the property and acquired a smaller property for occupation by her and invested the surplus in an investment bond.
On Mrs Eversden's death, the trust property consisted of a 95% interest in the smaller property valued at £171,000 and a 95% interest in the bond valued at £150,000, Mrs Eversden having owned each of the 5% interests.
No inheritance tax (IHT) was paid since Mrs Eversden had no interest in the trust property on her death.
The judgement refers to the case of Ingram v IRC , which defines property as a specific interest that can co-exist with other interests in the same physical object.
Accordingly, donors can derive a benefit from an object in which they have given an interest so long as they do not derive benefit from that interest and the benefit can be shown to be referable to the specific proprietary interest retained.
In the case of Eversden, the 5% interest the settlor retained as a tenant in common in equity conferred a right of occupation of the property.
She was not entitled to sole or exclusive occupation and the trustees could make a decision to dilute or extinguish her occupation.
Her occupation by virtue of this 5% interest prevented her from being treated as the life tenant of the trust once her husband had died.
One other point of definition was that the trustees held the 5% interests in the new home and the bond as bare trustees for the settlor (since the second property and the bond were in their name) and there was no question that the 5% interests formed part of the trust fund.
Regular readers of this page will by now appreciate an understanding of concepts such as tenants in common versus sole and joint ownership, trust versus bare trust and property as physical object versus property as legal interest is essential since the scheme lives and dies on the correct application of these concepts.
An individual's interest in property is chargeable to IHT on his death. However, if the interest is transferred by way of gift and the donor survives seven years then the interest is exempt. But, if the donor can benefit from the interest then the exemption does not apply.
There are exceptions to these exclusions, including transfers between spouses. How these rules work can be more clearly seen in the table below left, which drills down through the layers of the legislation.
HM Revenue & Customs (HMRC) argued that the exception in s.102(5)(a) is intended to be temporary and is confined to the period when the gift is vested in the spouse, for example, only so long as the husband was life tenant of the trust.
Whether there is a gift that constitutes an exempt transfer is to be determined at the date of the death of the donor when the full force of s.102 applies.
However, the court ruled the relevant date for the application of s.102(5)(a) was the date of the gift once the donor had died and there was no limit to the exclusion.
HMRC did not suggest the scheme was a sham, nor did it fail because it was a scheme, however, it is difficult to see what the scheme achieves other than tax avoidance.
The strategy employed is alienation by transferring property into trust coupled with creating property interests as tenants in common.
The anti-avoidance response is to look through or ignore the legal effect of the trust and this is achieved for IHT purposes by the gifts with reservation of benefit or GROB rules.
If these rules apply to a trust then the gift into trust is ineffective for IHT purposes and the property gifted remains in the estate of the donor so long as the benefit is retained.
However, in this case the exclusion disapplied the GROB rules. The scheme accepts an invitation in the IHT law and should be categorised as a violet strategy, at the cool end of the spectrum. There is, therefore, little danger that the scheme could be viewed as unacceptable tax avoidance by the court, nor was it.
Does the scheme fall within the Ramsay principle? The Revenue have not invoked the Ramsay principle and it would be difficult to prove the trust involved circularity or was preordained, although the man in the street would be hard put to see that anything "real" had happened.
In this case the courts have not sought to extend their remit outside of interpreting the law and establishing the legal facts.
They have not sought to tax on the basis of the intentions of the participants nor on the substantive reality of the arrangements.
The real problem in Eversden was the structure of the IHT and GROB code, as the judge said: "The problem if it exists derives from s.49, which treats the acquisition of an interest in possession as equivalent to the acquisition of the property itself.
"That has the result that, in the present case, the estate of the settlor's husband is taxed on the property, but that of the settlor is not.
"There is nothing in s.102 to modify that aspect of the scheme of the 1984 Act. If that is of concern to the HMRC, they must look for correction to Parliament, not to the courts."
The correction HMRC sought was the pre-owned assets regime, since they realised that attempting to introduce level five anti-avoidance legislation within the IHT code would not work.
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