tax & jurisdiction
Inheritance tax products from Skandia, Clerical Medical International and Scottish Equitable International have been saved from the clutches of the UK's revenue service after its latest attempt to appeal a decision against it failed.
Inland Revenue has tried to appeal three times against this case and this is the third consecutive time the case has been dismissed in court. So for the moment the structure looks safe, although it is possible Inland Revenue could ask to appeal to the House of Lords.
However, this decision may push the government into closing any loopholes through legislation. In the Eversden case, as it is called, the Revenue decided that property transferred to a trust by the settlor was liable to inheritance tax (IHT) and it was this decision that threatened the whole structure.
In 1988 Mrs Greenstock transferred her house to trustees. The trustees held 5% of the trust fund for her absolutely. The terms of the trust over the remaining 95% of the fund required the trustees to pay the income to her husband during his lifetime.
Following Mr Greenstock's death, the capital and income of the 95% fund was to be held on discretionary trusts for a class of beneficiaries that included the settlor Mrs Greenstock and her children. The trustees did not use this power of appointment. Mrs Greenstock died in 1998 and the trust was transferred down to the children.
On Mr Greenstock's death in 1992 the then value of the trust fund was included in his estate as he was entitled to the trust income. In 1998 the trust fund apparently consisted of a 95% interest in a replacement house that had been occupied by the Mrs Greenstock before her death and a 95% interest in an investment bond. Inland Revenue claimed that the trust should be treated as subject to a reservation of benefit by Mrs Greenstock and liable to IHT as part of her estate on her death.
Lord Justice Carnwath said the disposal of property by way of gift in 1988 was an exempt transfer between spouses. Accordingly it is outside the reservation rules and the settlor's estate is not subject to tax in relation to the subject matter of the gift.
Margaret Jago, tax and trust technical manager at Scottish Equitable International, said: 'The revenue claimed that the trust capital should be treated as subject to a reservation of benefit by Mrs Greenstock ' keeping the capital in her estate for tax purposes. Even though the initial gift had been to her husband for tax purposes, giving her an exemption from the gift with reservation rules at this point, this protection had fallen away on his death.
'Inland Revenue has gone through the courts to try and claim thousands of pounds dismissed each year through this loophole. It is possible the current legislation could change in the near future to amend this situation.'
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