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Matthew Hutton MA, CTA (fellow), AIIT, TEP presenter of Monthly Tax Review (MTR), reports two potential Inheritance Tax planning arrangements.

Matthew Hutton

Context

The following two strategies were suggested by Chris Whitehouse at a Conference on 21 June 2007. 

Family debt arrangement

Family debt (or ‘IOU’) arrangements continue to be attractive for Inheritance Tax (IHT) purposes, so long as the debt is not settled. For example, Mr A sells the shares in his investment company to his wife (or civil partner), the price being left outstanding as a debt repayable on the death of the survivor. Mr A gives the debt to his adult children. The effect is that Mr and Mrs A retain ownership of, and income from, the company between them. There is a potentially exempt transfer of the capital value gifted to the children and hence a seven year risk of IHT, although this is insurable.

There is no Gift with Reservation (GWR) between husband and wife, to the extent of any gift (FA 1986, s 102(5)). Nor is there any Capital Gains Tax liability on the sale, which is spouse exempt (TCGA 1992, s 58). There is also an exclusion from a Pre-Owned Assets (POA) income tax charge for transfers between spouses (or civil partners) (FA 2004, Sch 15 para 1(1)(b)). There is a risk that the loan may fall to be disallowable as a deduction from Mr A’s estate, and some care is therefore required (FA 1986, s 103). This arrangement can equally apply to the family home, although Stamp Duty Land Tax may be in point and, as mentioned, the debt should not be settled.

Self-settlement of the nil-rate band

Suppose that on 1 July 2007, Mr A settled £300,000 cash on a life interest trust for himself, remainder to his children. The trustees have no power to advance capital to Mr A. The trustees invest in buy-to-let property. For IHT purposes, Mr A makes an immediately chargeable transfer, which falls within his available nil rate band. The interest in possession does not form part of Mr A’s estate.  Mr A had probably not made a GWR, on the basis that there was an effective ‘carve-out’ since he never gave away income, only capital. Mr A was not in occupation of the let property, and no POA income tax charge would arise. This arrangement is effective for land or chattels, but otherwise there was a pre-owned assets problem due to FA 2004, Sch 15 para 8 (Intangible property comprised in settlement where settlor retains an interest).

(Taxation 11 October 2007, p 391, Mark McLaughlin reporting the Longmark Tax Conferences Ltd North West Tax Planning Conference on 21 June 2007).

 
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