draft legislation follows Inland revenue's failed attempts to appeal eversden case
Several trust products that mitigate inheritance tax (IHT) have been withdrawn from the market, following the Inland Revenue's decision to close a bitterly defended loophole in tax legislation.
Products that will be affected include Scottish Equitable International Access Plus Trust and Clerical Medical's Family Wealth Trust. Both have stopped being sold.
The new legislation is still in draft stage. At this stage the rule will not affect people who have held these products for six months or more. However, for those who have held these products for less than six months the rules are still unclear.
Margaret Jago, tax and trust technical manager at Scottish Equitable International, said: 'The only possible advice is to do nothing as it is draft legislation. It is a mistake for people to take action as it could change as it goes through parliament. When it does we will take the appropriate legal advice and action.'
Rod Macdonald, marketing manager at Clerical Medical, said: 'It was expected the Inland Revenue would close this loophole. But there are still a lot of opportunities for IHT products. For example, the nil rate band for married couples still gives IHT planning opportunities.'
The move came following the failure of the Inland Revenue in its third attempt to appeal a case that used this loophole. Instead of appealing to the House of Lords, the Inland Revenue has decided to take action by changing the legislation.
In this particular case called the Eversden case, the Revenue decided property transferred to a trust by the settlor was liable to 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 in 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. The Inland Revenue claimed 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.
The Inland 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 death.
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