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Inheritance Tax Planning – Don’t Leave It Too Late!

It is obviously sensible to take steps to mitigate Inheritance Tax (IHT) liabilities that may arise on your death and, as a tribunal decision vividly showed, it is even wiser to take professional advice sooner rather than later.

The case concerned a woman who was on her deathbed, suffering from a terminal brain tumour, when she belatedly cast her mind to IHT. Just days before she died, she entered into a complex tax mitigation scheme which, in essence, involved her borrowing £1 million to buy a life income interest in an offshore trust.

The executor of her will argued that the value of her estate for IHT purposes had thus been reduced by the amount of the loan. However, HM Revenue and Customs (HMRC) took the view that the mitigation scheme was entirely ineffective on the basis that the purchase of the income interest involved a transfer of value, within the meaning of Section 3(1) of the Inheritance Tax Act 1984.

In dismissing the executor’s appeal against that decision, the First-tier Tribunal found that the value of the income interest was not £1 million, but nil. Far from being at arm’s length, the transaction had been part of a pre-packaged sequence of events that was intended to achieve an IHT saving.

There was no independent assessment of whether the acquisition of the income interest made commercial sense or whether the price paid for it represented a fair market value. It was a very strange bargain for someone who was well aware that she only had a short time to live to purchase a life interest in a right to income. The executor’s argument that the woman had had no intention to confer a gratuitous benefit on her heirs also fell on fallow ground.

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