A recent case reminds us of the pitfalls of so-called deathbed planning as well as the dangers of getting involved in contrived tax mitigation schemes.
In the recent case of Nader & Ors v Revenue and Customs (INHERITANCE TAX: Trusts)  UKFTT 294 (TC), Miss Dickins who was on her deathbed, suffering from a terminal brain tumour, belatedly cast her mind to inheritance tax (IHT).
The facts of the case are complicated but in summary, just days before Miss Dickins died on 10 December 2010, she entered into a complex IHT mitigation scheme. The scheme, in essence, involved her borrowing £1 million to buy a life income interest in an offshore trust for the same sum. The original loan was then repaid out of and replaced by an identical loan to her from the trust under which she had the income interest. The beneficiaries under Miss Dickinsʼ Will were then appointed as beneficiaries under the trust. The desired result would have been that the beneficiaries were entitled to £1m under the trust and the estate was reduced by the £1m liability.
The key to the scheme working was that the purchase of the income interest was a commercial transaction. If the price paid by Miss Dickins for the income interest was the true market value, the transaction would have been a commercial one (in other words a “bargain at arm’s length”) and not a transfer of value for IHT purposes. If there was a transfer of value immediately before death then this would, of course, be taken into account in the IHT calculation on the estate (as claimed by HMRC).
The executor of her will (Mr Nader) argued that the value of her estate for IHT purposes had been reduced by the amount of the loan and that the provisions of s. 10 IHTA applied to prevent a transfer of value occurring on the basis that there was no intention to confer a gratuitous benefit when Miss Dickins bought the income interest. However, the court found that the executor could not demonstrate this. HMRC took the correct view that the mitigation scheme was entirely ineffective on the basis that the purchase of the income interest involved a transfer of value, within the meaning of Section 3(1) of the Inheritance Tax Act 1984.
The judgment runs for 51 pages and it is clear that the appellants did not understand what was involved in the planning arrangement. Furthermore, the transaction had been part of a pre-packaged sequence of events which was intended to achieve an inheritance tax saving.
In dismissing the executor’s appeal against that decision, the First-tier Tribunal found that the value of the income interest was not £1 million, but nil, which resulted in a costly mistake. Not to mention the fees of £100,000 paid to the scheme promoters.
It should be noted that legislation changes in 2013 on the inheritance tax treatment of liabilities – see our earlier bulletin – has made this type of planning no longer permissible in any event.
It is obviously sensible to take steps to mitigate inheritance tax liabilities that may arise on death. However, this case illustrates the danger of so-called deathbed planning and reiterates that planning should not be left until it is too late. In practice there are a couple of deathbed planning strategies which work, namely transferring assets to a surviving spouse or making a gift to reduce the value of the estate to below £2 million to preserve the residence nil rate band. In any event clients should ensure they understand the implications of any planning they wish to undertake – there are many inheritance tax planning schemes which are available that you can discuss with your clients before it is too late!