Court Of Appeal Rules Against Inland Revenue In IHT Test Case

by Jason Gorringe, Tax-News.com, London

19 May 2003

The Inland Revenue has lost its appeal in the so-called Eversden case, a development which could allow many families to save thousands of pounds in inheritance tax by using trust funds to transfer ownership of property.

As house prices have soared in the UK, more and more homeowners have found themselves liable for the 40% inheritance tax which kicks in above a £255,000 threshold (recently increased from £250,000 in the 2003 budget). However, in the case of IRC v Eversden, Margaret Greenstock created a defeasible life interest trust which divvied the interest in their house 95% to her husband and 5% to Mrs. Greenstock. After her husband's death, the trust allowed Mrs Greenstock to continue to live in the house, which on her death was sold, and the profit put into an investment bond.

Previous to the original High Court ruling last year, tax rules did not allow an individual to gain exemption from taxation by giving away an asset as a gift whilst still benefiting from that asset, as appeared to be the situation in the Eversden case. This was the basis of the Inland Revenue's argument, although it was ultimately rejected by the panel of judges in the Court of Appeal. The panel also failed to grant the Revenue leave to appeal to the UK's highest law court, the House of Lords.

Whilst appears to be a significant victory for the taxpayer against the Revenue, some observers believe that the tax man will eventually win the day, if the Chancellor Gordon Brown decides to close the loophole by tacking an amendment to the Finance Bill currently travelling through Parliament.

As a consequence, insurance firms such as Clerical Medical and Scottish Equitable have set up specific trust schemes allowing families to benefit from the new ruling before a possible change in the law overturns the court decision.

Rising house prices brought an extra 1% of home owners into the IHT net last year, according to some reports. However, over the next few years this is expected to rise a further 5% leaving one tenth of property owners liable for the tax, recent estimates have suggested.

Recommended