So regularly at present the media is full of stories of the Courts and Tribunals considering tax avoidance strategies and using “purposive” or “Ramsay” interpretations of the legislation to overturn the attempted tax advantage. But twice in the last month the Chancery division has moved in quite the opposite manner, agreeing to the rescission of transactions where an individual has gifted property to a trust only to later discover there was a hefty tax burden attached to that transfer.
The first case concerned a Mr Philip Van Der Merwe who, in 2006, placed his family home into a trust shortly before he was to become treated by the UK tax system as deemed domicile here. Unfortunately for him, only 5 days earlier there had been a radical reform of the UK taxation of trusts. What had appeared a reasonable plan a few months earlier therefore turned out to be a trigger event for lifetime and trust inheritance tax charges on his home.
The second, also published in April 2016, concerned a farming partnership between Messrs Bainbridge. In an apparent attempt to protect against any future claims against the father’s estate by other children or by divorcing spouses within the family, they undertook to transfer their farmland into a discretionary trust in the summer of 2011. The family claim that they were advised by their solicitors that the transfer would be free of capital gains tax, although the solicitors deny giving such advice. Crucially though the transfer did give rise to a CGT charge in excess of £200,000, the effect of which on the family was described as “crushing”.
In both cases the Court considered various cases, including what has become the leading precedent in this area Pitt v Holt , and in both cases concluded that the necessary hurdles were overcome in order to enable the transaction to be rescinded, as if it had never taken place. In the case of Messrs Bainbridge this was done even though the trustees had, in the intervening period, sold some of the land and purchased replacement land.
It’s easy to have sympathy for Messrs Bainbridge, who seem to have been motivated by genuine reasons and to have believed that they’d been advised as to the capital gains tax implications of the transaction. I’d say it’s rather harder to have sympathy for Mr Van Der Merwe, who seems to have undertaken his transaction for no better reason than to avoid exposure to UK inheritance tax and inadvertently to have created a different exposure to that tax.
However, whilst the two decisions and the 2013 case of Pitt v Holt demonstrate a willingness of the court system to consider rectification, the cost and stress of having gone through an HMRC intervention and then prepared and presented a legal case of this type must have been significant for both parties. So rather than seeing rectification as a safety net to ill advised transactions, a better lesson to take from these examples is the importance of good quality tax advice when dabbling in the complex area of trust tax.
Graham Boar is a tax director at UHY Hacker Young who, as well as being a Chartered Accountant is a full member of STEP (the Society of Trust and Estate Practitioners). To discuss this story or if you have any queries regarding trust tax please contact Graham on 01462 687333 or via his email, email@example.com.