Deliberate avoidance of IHT

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    An arrangement between the beneficiaries of an estate has just been declared void as a deliberate
    avoidance of IHT.

    A man was due to inherit the sum of £665,000 from a legacy in his stepfather’s will. His step-father died in 2004, leaving an estate worth £7 million. In 2005 he renounced his entitlement to the legacy which meant that the residuary beneficiary (his mother) inherited £665,000 more than she would otherwise have done. This transfer was then covered by the spousal exemption and no IHT was payable. A few days later, she gifted £1 million to her son.

    The legacies contained in the Will were to be distributed ‘free of tax’, which meant that the IHT payable would be paid out of the mother’s share of the estate.

    HM Revenue and Customs (HMRC) challenged the arrangement, the practical effect of which was that instead of a large sum of IHT going to the Exchequer, it passed to the son and his mother’s gift to him would only be subject to IHT if she failed to live seven years as it was a PET.

    HMRC claimed that the transfer was ineffective because it had been made ‘for consideration in money or money’s worth’.

    The man’s mother claimed that her gift of £1 million to her son resulted from an earlier promise she had made to provide capital for his business and was also in part a wedding present, as he had recently married. Her son gave evidence that he had no need of the legacy, as he was financially secure, but accepted the gift a few days later nonetheless.

    One of the problems for the mother was that she had proposed the same arrangement with regard to her two daughters. Once the anti-avoidance legislation had been pointed out to them, the idea of renouncing their legacies was not pursued. However, the mother continued to claim that her son’s renunciation was not part of a scheme.

    The evidence to suggest the scheme had been entirely about avoiding IHT was strong. The whole plan had been flawed from the outset and HMRC were successful in having their assessment to
    IHT upheld.

    According to unbiased.co.uk, HM Revenue & Customs will collect an additional £2.2 billion in inheritance tax (IHT) this year because of estate planning failures. They state that 81% of people do not make plans to reduce the IHT payable on their estate.

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    About Matt Walkden

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