TT41: Inheritance Tax Plannings

July 22, 2003

… and the Eversden Trust scheme really annoyed them!
In a well-publicised tax case called IRC v Eversden, the taxpayer established a trust for the lifetime benefit of her husband but with the proviso that, on his death, the trust’s assets would be held for a wide class of beneficiaries including her. She survived her husband and on her death the Inland Revenue claimed inheritance tax (“IHT”) not only on her free estate but also on the value of the trust fund on the grounds that she had “reserved a benefit” in the trust fund when she established it. The IHT demand was disputed on the grounds that the gift establishing the trust fund was exempt IHT (as her spouse had a life interest in the trust fund) and, as such, the legislation specifically prevented the “reservation of benefit” rules from applying.

Before the Special Commissioners and in the High Court and the Court of Appeal, the Inland Revenue’s theories were rejected. The decision of the Court of Appeal was particularly robust and the Inland Revenue were denied the right of appeal to the House of Lords.
So is Eversden the key to IHT avoidance?
In the right circumstances, the Eversden decision could form a useful part of an IHT mitigation strategy. If one spouse to a marriage owned assets that would not generate capital gains tax liabilities on disposal (such as cash or a main residence), these could be settled on trust for the other spouse but with the first spouse having an interest in the capital of the trust. In due course, the second spouse’s interest could be revoked in favour of say children or grandchildren. Assets would have been given away for IHT purposes but the donor spouse would have retained a capital interest.
Sadly the taxman is fighting back
Unsurprisingly, the Inland Revenue have not taken their defeat lying down. The 2003 Finance Bill that is currently being considered by Parliament has been revised to include “anti-Eversden” blocking legislation. This applies to trusts established on or after Friday 20 June and the proposed legislation makes it clear that the “reservation of benefit” rules will apply in the circumstances outlined above. Trusts established prior to 20 June are not affected.

It should be stressed that whilst Eversden arrangements had a temporary attractiveness, they are not the only IHT planning tools available.

Barnes Roffe Topical Tips

  • If you don’t have an up to date Will, this should be remedied as a matter of urgency as the position could be problematic from both an IHT and a commercial perspective.
  • Substantial savings can be achieved by having your Will suitably structured.
  • Consider making lifetime gifts (perhaps using trust arrangements).
  • Consider exploiting assets qualifying for Business Property Relief (see the Double-Dipping concept outlined in Topical Tips Issue 6).
  • Consider using suitable insurance-based products.

Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.

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