Inland Revenue Loses Inheritance Tax Case

by Justin Gorringe, Tax-News.com, London

22 July 2002

The UK High Court has ruled in favour of taxpayers over an inheritance tax loophole known as a 'defeasible life interest trust'. Under the arrangement, which has been in use for many years in the UK, a donor can give away up to UK£250,000 of assets and continue to receive the income from the assets. If the donor lives for seven years following the transfer (which must be an outright gift) then the assets are free of inheritance tax on death. The scheme is designed for liquid assets such as cash or investments, not property.

The arrangement is often used by parents who want to protect their assets from inheritance tax by putting them in trust for children while ensuring they can still benefit from the assets.

The Inland Revenue had brought a test case in an attempt to close the loophole, but lost. The government is now expected legislate against the practice in next year's Finance Bill.

A number of insurance companies offer plans based on the scheme, including Clerical Medical, Legal & General and Norwich Union, but the structure can easily be set up by a lawyer.

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