Deathbed planning


Postby casino on Tue Feb 01, 2005 4:18 am

I have a single client who has been given 3/6 months to live. She has liquid assets of around £500,000 and a property worth £250,000.
Her adult sons will inherit the estate, is there any plans that would help mitigate the IHT bill?
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Postby Anthony Nixon on Tue Feb 01, 2005 4:30 am

The one plan that may work at this stage is the purchase of an interest in an excluded property trust.

A trust which has been set up by a non-UK domiciled person and holds assets outside the UK is excluded property for the purposes of inheritance tax. A number of offshore institutions have trusts already in existence for this kind of planning.

Your client would purchase a defined interest in the trust in a commercial transaction ensuring that rights to some real assets exist to be passed to the clientÂ’s children. The client would almost certainly have an interest in possession. In most circumstances that interest would be taxable on the clientÂ’s death. But because the interest is in excluded property it is exempt from tax.

The offshore institution takes its cut of course, and care is needed to ensure that no other tax charges are incurred. Compared with 40% inheritance tax there should still be a major saving for the client.

Anthony Nixon
Partner
Lester Aldridge Solicitors
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Postby ess_ay_emm on Tue Feb 01, 2005 7:56 am

I would certainly agree with the proposition of A Nixon Esq.

However, do not forget that gifts to charities will be exempt from tax! (Quite relevant, considering the events of late)

Sam Mensah BSc, LLM
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Postby Taxbar on Wed Feb 02, 2005 5:35 am

A word of caution.
The Excluded Property Trust route is in my view highly artifical and is unlikely to work.

A similar tax arrangement (for CGT) where individuals sought to purchase trust interests in order to share in the trust losses was successfully atttacked by the Inland Revenue and the losses purchased commercially disallowed. This case did not even make it to the courts!

The other commonsense factor is that the Capital Taxes Office ( who adminsiter Inheritance Tax) have just introduced a draconian regime that attacks planning carried out 18 years ago.

Is it likely that even if they accept the legal merits of the Excluded Property Scheme that they will not simply cancel it retrospcetively?

Daniel Feingold
STP
info@stratax.co.uk
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Postby johnfkavanagh on Wed Feb 02, 2005 3:35 pm

Anthony Nixon only went so far as to suggest that the purchase of a life interest in an excluded property trust "may" work, so I assume that he also has some reservations about the scheme, although they might not be the same as Dabiel Feingold's.

We are living in interesting times as regards attitudes to tax avoidance schemes. While it is certainly true that the Government would like to crack down on tax avoidance as hard as it can, the signs are that the Courts are in fact retreating from a hard line view based on subjective tests of "artificiality" and ther like. While artificiality may have been one of the main criteria in the days when Furniss v Dawson and Craven v White were the leading cases on what was and was not acceptable tax avoidance, it seems to me that there has been a substantial shift in judicial attitudes since Westmoreland v MacNiven and subsequent cases. In the context of this scheme, I should have thought that the Courts would be concerning themselves with whether it could be shown that the aseets in question were at the relevant time in fact "excluded property" within the plain language of the legislation, and rather less on how that result was achieved.

While I think that the litigation risks are probably less than Daniel Feingold seems to think, it seems to me that the real "commonsense factor" in this is what alternatives there are to the excluded property trust scheme. If there are no acceptable alternatives, the parties will have to decide whether it is worth a gamble that the scheme might succeed.

As regards the risk of anti-avoidance legislation to counter the scheme, I have to say that my first instinct is to suggest that this is probably negligible. The novelty of the pre-owned assets regime is that it introduces an income tax charge which punishes, but does not negate, inheritance tax planning carried out some time ago. I am experiencing real difficulties in imagining how a similar attack could be made on the excluded property trust scheme but I have to confess that I have not spent the many hours in contemplation of this issue which the subject probably demands. I would welcome the comments of other contributors on this issue.

John Kavanagh
UK Tax Consulting Ltd
Chartered Tax Advisers
www.uktaxconsulting.co.uk
mail@uktaxconsulting.com
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Postby Anthony Nixon on Thu Feb 03, 2005 1:11 am

IÂ’m interested to see that my contribution has provoked some argument.

Yes Dan is right: the excluded property trust idea, which I outlined, is an artificial planning exercise. But there is not yet any evidence that the Revenue will attack it successfully.

By coincidence, on the day after my posting, I heard Gerry Hart, a well-known lecturer and recent past president of the Chartered Institute of Taxation, refer to the same idea while warning that the Revenue would not like it!

Some tax planning is a little like going to the races. Those with a taste for a gamble like to “invest” their money on an uncertain horse with the chance of an excellent return. Others (more prudent perhaps) keep their money firmly folded in their wallets!

Anthony Nixon
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Postby johnfkavanagh on Thu Feb 03, 2005 2:14 am

I am not sure that it is clear from my earlier contribution that what I meant was that I felt the risk of retrospective legislation against the scheme was negligible. It would be simplicity itself to prevent the scheme being effective going forward but that is not quite the same point.

John Kavanagh
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Postby Taxbar on Fri Feb 04, 2005 3:17 am

As I have said above, the real threat to this particular scheme is: Who is the Settlor for IHT purposes?
That was the Achilles heel of the CGT trust scheme that failed ( without a Court fight!) albeit on a slightly different legal definition of who is the Settlor?

I have reviewed this strategy for clients and the Opinion I have formed is that it is unlikely to work.
I appreciate Anthony's perspective and respect his position entirely.

Daniel Feingold
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Postby johnfkavanagh on Fri Feb 04, 2005 7:14 am

Thank you, Daniel, for elucidating further on the reasons why you think the scheme will fail.

Obviously, whether a scheme actually goes to the Courts or the Special Commissioners naturally depends on how the parties view the strengths of their respective positions. I have been involved in cases which have gone to the Courts where the taxpayer's advisers thought that the taxpayer probably did not deserve to win but did and vice versa. Anyone who has been involved in the litigation process will know that there is an element of the lottery about it.

While I take your point about the purchased trust loss schemes, one (admittedly bullish) interpretation of the fact that they did not go the courts means that no precedent has been set! In relation to the commerciality or artificiality of the scheme, it seems to me that there is a real difference between someone being put into a position where they can obtain relief for a tax loss they have not in fact incurred and somebody who has effectively converted one form of asset into another which is treated more favourably for IHT purposes. But that is just my opinion and at the end of the day, neither my opinion nor, with respect, yours, will determine whether the scheme will succeed.

While I accept that there may well be issues as to whether the purchaser of a life interest can be a settlor for the purposes of section 44 IHTA 1984, my personal view is that they are at all clear cut.

I would not like anyone to gain the impression that I am an enthusiastic advocate of the scheme (I am not) or that I think that there is more than a small chance that it will work (I do not). If I was a betting man, I would ask for long odds before putting my money on a win! However, it is a certainty that sitting on your hands doing nothing is not going to get the job done as two out of the other three contributors answering this query seem to have concluded. I entirely agree with Anthony that in the final analysis it is for the client to decide whether he or she is prepared to take the risk.

John Kavanagh
UK Tax Consulting Ltd
Chartered Tax Advisers
www.uktaxconsulting.co.uk
mail@uktaxconsulting.com
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Postby sharpener on Sat Feb 11, 2006 9:25 am

Does the advice on p24 of Matthew Hutton's December newsletter at http://www.taxationweb.co.uk/taxevents/MTR_December2005.pdf mean that Excluded Property Trusts are no longer of use as an alternative to Discounted Gift Trusts where the life expectancy of the settlor (and hence the discount) is not great?
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