Profiting from a tax loophole

More and more houses creep over the threshold

by Simon Gompertz

Whether it's a millionaire's pile or a terraced home in a big city, the risk of going above the inheritance tax threshold has been increasing fast

Before the Budget, around one and a half million people lived in a house valued at more than the inheritance tax threshold.

One in 12 houses sold were worth more.

Gordon Brown has raised the threshold by just £5,000, to £255,000.

Anything over and above that level incurs 40 per cent tax.

Court challenge

The Inland Revenue has tried to challenge one couple's device to avoid inheritance tax on their home by setting up a trust.

Margaret Greenstock created what is known as a 'defeasible life interest trust' which gave her husband a 95% interest in their house for his life.

New Inheritance Tax threshold

£255,000

She kept the other 5% stake.

After he died the trust gave Mrs Greenstock and family members the use of the house.

Investment bond

Mrs Greenstock continued to live in the house and sold it about a year after her husband's death.

The trustees then bought a new house and put the money that was left over into an investment bond.

However, when Mrs Greenstock died the Inland Revenue decided to pounce.

They argued that the 95% interest owned by the trust should be included in Mrs Greenstock's estate for inheritance tax purposes.

This is because she had benefited from the assets she had put into the trust.

Appeal

Mrs Greenstock's executors won an appeal to the Special Commissioners, but the Inland Revenue counter-appealed to the High Court.

The Revenue lost the case and were granted no leave to appeal. So on the face of it it's open to many others to do the same.

A precedent?

Francesca Lagerberg, Financial Adviser at Smith and Williamson, says she doubts this case will open the floodgates to people doing the same.

"It's not quite as easy to use this case as it may seem," says Francesca.

"For certain people it gives them the real possibility of staying in their own home and escape inheritance tax but it's expensive. People might find there are other things they can do that are much better and easier to use."

In fact it's quite difficult to take advantage.

Setting up trusts to protect a home or savings from inheritance tax can be very complicated.

Easier option

There is a much simpler alternative if you give your home to a family member who then comes to live with you. Give and live.

Accountant Bob Rothenberg says "Just make the transfer so the child owns say half of the house and the parent remains owner of the other half.

"There's no problem whatsoever as far as the Revenue is concerned provided that the child pays his or her own share of the property expenses."

As for the trusts, it's widely tipped that Gordon Brown will now use the Finance Bill that's going through parliament after the budget to restrict their use again.

If there is to be inheritance tax, goes the argument, it's unfair that a few clever people should find ways to avoid paying it.