Ducking The Tax

Ducking The Tax

by Robin Stevenson

As Inheritance Tax planning goes, this is certainly a different way around things… Robin Stevenson shares some thought provoking stories.

We’ve previously discussed a couple of extreme methods of passing assets on death in the hope of avoiding the associated inheritance tax charge. Their brilliance is in their simplicity.

Firstly, a Sunday paper, I forget which one, described this situation…

Mum died long ago and now Dad is wondering what to do to lessen the IHT exposure on his estate. His will leaves everything to his only child, his son who is married with his own family. Unfortunately, Dad has just received a devastating diagnosis and the outlook is bleak without time for the usual IHT planning strategies to work.

The suggestion put forward by the journalist? Son divorces his wife, which leaves her free to marry her step-father. Dad does indeed marry her, and then rewrites his will to leave everything to his new spouse. Dad dies and his whole estate then passes, completely IHT tax free thanks to spousal exemption, to his newly widowed wife. Son then remarries his recently widowed ex-wife who, for a brief period of time, was his step-mother, and she transfers the assets to him. You can’t knock it, I mean it would take a brave HMRC to try and use GAAR to undo this avoidance strategy!

Next, we had the real-life situation recently where two heterosexual men were living together in the same property. One of the men owned the property, took a lodger and over the years they had become best friends and shared the house.

The house owner wanted to leave the house to his friend but was worried that the house might need to be sold to pay the IHT. To get around this problem, they married each other. Discussing this with someone, I was asked why the homeowner didn’t simply gift the property to his friend during his lifetime because the CGT would have been covered by Private Residence Relief. And this is true, but that is CGT, for IHT purposes if you have given the property away but continue to use it then the IHT rules bring that property back into your estate under the Gift with Reservation of Benefit rules.

Actually, a similar situation but with a completely different outcome, was argued in the courts a few years back. In this case two elderly sisters had lived in the same house all their lives, and they faced exactly the same problem being that although they each wanted to leave the house to the other, the IHT arising would mean the house would have to be sold, and of course they couldn’t marry.

Perhaps rather than messing around with an IHT residence nil rate band, which was a hasty piece of tax legislation and wouldn’t have helped the sisters because the property has to be left down a generation in order to qualify, HMRC could instead bring in new IHT legislation similar to the CGT main residence relief, whereby a person’s home is exempt in the same ratio as it has been their main residence. There we go, tax simplification for you, the same tax relief for two taxes!

But anyway, the reason for this editorial is an article I read recently which covered the situation of a Russian lady who was so against paying IHT on her mother’s estate that she assumed her mother’s identity. By assuming her mother’s identity, the daughter convinced the tax authorities that her mother hadn’t actually died and therefore the question of estate duty simply went away.

Of course, this is one of those things which catch up with you later. Mother was elderly when she died, and daughter (who is now Mother) also lived to a ripe old age and “Mother’s” official age was 122 years 164 days when she died!

A different approach, but I wouldn’t recommend it as a sensible tax planning strategy.

Money Matters is written by Robin Stevenson CTA ATT TEP, Head of Taxation & Private Clients, Swindells LLP Chartered Accountants & Chartered Tax Advisers Tel: 01825 763366

As individual circumstances vary considerably from person to person, the views expressed in this article are meant only as a general guide, and any specific advice required should be sought from your own professional adviser or by contacting the writer at his place of work. No responsibility for loss resulting to any person acting as a result of any material in the above article can be accepted by the writer or Swindells LLP.