An Inheritance Tax (IHT) arrangement involving a ‘bargain’ between the participants has recently been quashed.
A man was due to inherit the sum of £665,000 from a legacy in his step-father’s will. His step-father died in 2004, leaving a gross estate of some £7 million. In 2005, the man renounced his entitlement to the legacy, which meant that the residuary beneficiary (his mother) inherited £665,000 more than she would otherwise have done. Transfers to spouses are not subject to IHT. A few days later, she gave her son £1 million.
The legacies were to be distributed ‘free of tax’, which meant that the IHT payable would be paid out of the mother’s share of the estate. The IHT due on the legacy of £665,000 would be approximately £400,000 were the legacy not disclaimed.
HM Revenue and Customs (HMRC) challenged the arrangement, the practical effect of which was that instead of £400,000 going to the Exchequer, it passed to the son and his mother’s gift to him would only be subject to IHT if she failed to live seven years. HMRC claimed that the transfer was ineffective because it had been made ‘for consideration in money or money’s worth’.
The man’s mother claimed that her gift of £1 million to her son resulted from an earlier promise she had made to provide capital for his business and was also in part a wedding present, as he had recently married. Her son gave evidence that he had no need of the legacy, as he was financially secure, but accepted the gift a few days later nonetheless.
One of the problems for the mother was that she had proposed the same arrangement with regard to her two daughters, each of whom also stood to inherit £665,000 from legacies. Once the anti-avoidance legislation had been pointed out to them, the idea of renouncing their legacies was not pursued. However, the mother continued to claim that her son’s renunciation was not part of a scheme to reduce IHT.
Regrettably, there was copious evidence to contradict the version of events advanced by the mother and her son. The whole plan had been flawed from the outset and HMRC were successful in having their assessment to IHT upheld.