Mitigating the burden of inheritance tax

Today, it is not uncommon to find that one of the main assets an individual can have – the family home – outstrips the value of the nil rate band (currently £255,000) available for inheritance tax.

This means that more beneficiaries could potentially face a tax bill when dealing with a deceased person’s estate, and there are numerous mitigation plans available that seek to find ways to reduce or even eliminate the likelihood of such a charge.

One type of planning is based around the case of IRC v Eversden. The principle behind the case is that the home, which is owned by one spouse, is put into a trust for the other spouse.

After a suitable time period, the property is held on a discretionary trust in favour of a class of beneficiaries that include the spouses.

The husband and wife continue to live in the property.

The issue is whether the house has been effectively taken out of the spouses’ estate for IHT purposes. The Inland Revenue has argued that IHT is still due, because the remaining spouse continues to live in the home and therefore still retains a benefit from the gifted property (under the ‘gift with reservation’ rules).

However, in the case of Eversden, all courts have rejected this argument, including most recently the Court of Appeal. The court determined that the gift with reservation rules did not apply because the important first part of the steps outlined above involved a gift between a husband and wife.

Such gifts are not caught by the rules, as they are an exempt transfer between spouses. As the judge noted in refusing leave to appeal: ‘If that is of concern to the Revenue, it must look for correction to parliament, not to the courts.’

Although this decision is helpful, it does not offer the ‘pot of gold’ at the end of the rainbow to those seeking IHT solutions in relation to the family home. Firstly, Eversden is not suitable for all taxpayers – they have to be married and the schemes can be quite expensive.

Secondly, there are technical hurdles to consider, such as ensuring that the value of the property being settled is below the nil rate band to avoid paying a tax charge.

Perhaps of more concern is that the Eversden case might continue. The Revenue might seek to appeal directly to the House of Lords or look to reverse the decision by means of targeted legislation. There is still time for this to be included in the current finance bill.

However, even if legislation is not implemented now, it could be introduced at a later date and might apply by reference to the date of death of the donor rather than the date of the initial gift.

There are a number of other IHT planning options that might suit a taxpayer better, depending on their situation. Simple planning like making sure the nil rate band is properly used, a will is in place and is kept up-to-date, are good starting points.

Consequently, Eversden does not provide all the answers for IHT planning for the family home and the Court of Appeal decision may not be the final chapter in this story.

• Francesca Lagerberg is national tax director at Smith & Williamson, a professional and financial services group. For further discussion on this issue, email [email protected].