Revenue

Inheritance tax - avoidance scheme - transactions surrounding transfer of family home to trustees - circumventing 'reservation of benefit' provisions

Inland Revenue Commissioners v Eversden and Another: CA (Lords Justice Brooke and Carnwath and Mr Justice Nelson): 15 May 2003

In 1988, a settlor transferred the family home to trustees of a discretionary settlement for her husband during his life and thereafter for a class of beneficiaries that included the settlor.

The settlor and her husband continued living in the property until his death in 1992.

The property was then sold by the trustees, who purchased a replacement home for the settlor and investments.

The settlor lived in that home until her death.

A notice of determination was raised on the settlor's executors of liability for inheritance tax on the basis that the property held on the trusts of the settlement made by the deceased was property to which she had been beneficially entitled and was property subject to a reservation within section 102 of the Inheritance Tax Act 1984.

In July 2002, a judge upheld a determination by a special commissioner quashing the notice ([2002] STC 1109).

The Inland Revenue appealed.

David Ewart (instructed by the Solicitor, Inland Revenue) for the Inland Revenue; Andrew Thornhill QC and Jeremy Woolf (instructed by Triggs Wilkinson Mann) for the taxpayers.

Held, dismissing the appeal, that the transfer of the home to the trustees diminished the value of the settlor's estate and was thus a transfer of value (section 3 of the Act); that thereupon, her husband acquired an interest in possession in the trust fund and so was deemed beneficially entitled to the home (section 49(1)); that that transfer was an exempt transfer being attributable to property comprised in the estate of the transferor's spouse (section 18(1)); that on the settlor's death, apart from the provisions in section 102(5) that set out exemptions from section 102(1) for gifts 'subject to a reservation', the home was to be treated as part of her estate; but that, on a proper reading of the provisions, section 102(1) had to be treated as displaced by those of section 102(5) taken together with the section 18 exemption.