Potentially exempt transfer and residual benefits

One of the most common methods of planning to reduce or eradicate liability for inheritance tax (IHT) is for assets to be given away while a person is alive. If the person transferring the assets survives for 7 years, the gift is free of tax, if he or she dies within 7 years, there is a sliding scale for tax as the asset goes back into the estate.

The biggest single problem when giving away assets is where the person gifting the asset retains some form of residual benefit, such as continuing to live in a property, to receive some income from an asset and so forth, or in retaining any legal rights on the asset. Therefore the transferor is at the mercy of the transferees and if it is found that an income or such like is paid over from the transferee to the transferor, this will be classified as tax avoidance.

As an example of the legal difficulties which can arise, a  recent case dealt with a situation in which a very valuable  leasehold property in Knightsbridge was put into trust and a complex arrangement devised and the trust then sublet the property to a nominee company. This scheme was caught out by a technicality in that certain contractual covenants on the property still placed some legal obligation s on the transferor who therefore still retained some form of interest in the property.

This is a particularly technical example of what can happen, but bearing in mind the Inland Revenue are now particularly aggressive in challenging estates which would otherwise result in payment of IHT, all aspects need to be considered, great care taken, and experienced and specialist legal advice obtained.