The Inland Revenue will appeal a High Court decision which found in favour of woman who worked her...
The Inland Revenue will appeal a High Court decision which found in favour of woman who worked her way around an inheritance tax (IHT) loophole through the establishment of a trust.
Under the IHT rules, a person can give away up to £250,000 - which could be money or property - and this gift will not be liable to 40% tax.
Money gifted to a "discretionary trust" would be subject to an immediate 20% tax charge if in excess of £250,000 as a chargeable lifetime transfer. A possible further tax charge on death could also be incurred.
Despite changes to IHT rules in 1986, which bans the possibility of the donor earning interest on money which has been gifted, or residing in a property which has been given away, the Inland Revenue vs Eversden case found that there is a way around this restriction, otherwise referred to IR terminology as "gift with reservation of benefit".
According to tax accountants, Grant Thornton, in this case, a wife set up a trust and put a property into it, under the terms that she was a beneficiary and her husband had a life interest for six months. At the end of the six months, it became a fully discretionary trust, which allowed the wife to continue living in the property.
When the husband died, the property became the discretion of the trustees (Eversden), and the beneficiaries, which included the wife.
The Inland Revenue felt that under these circumstances, when the wife dies, the property is liable to IHT because she lived in it until death. However, says Grant Thornton, this is not the case because there is a specific let-out where the original gift is between spouses.
An Inland Revenue spokeswoman confirmed that Peter Twiddy, head of capital taxes offices at the Inland Revenue, has filed an appeal on this decision.
Mike Warburton, senior tax partner at Grant Thornton, believes the establishment of these trusts is a thorn in the Treasury's side. "The law can work in a way that is not intended by Parliament," he notes.
He is convinced that the Inland Revenue will push the Chancellor to change the rules in the next Budget, so that the establishment of these trusts to sidestep the reservation of benefit rule will not be possible in future. Twiddy was not available for comment on the appeal and the IR's position on the future of these trusts.
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