Determinable life interest trusts and IHT avoidance

The decision of the Court of Appeal in CIR v Eversden 2003 EWCA Civ 668 (noted in From The Courts on p4) has been keenly awaited. In the event, the Court of Appeal merely considered one narrow point on the basis of which the Court disallowed the Revenue appeal. The final decision therefore merely confirms the conclusion of the Special Commissioners, and the High Court. In argument before the Court of Appeal, Counsel for the Revenue suggested that a decision in favour of the taxpayer would lead to widespread tax avoidance, as the result of the legislation governing gifts made with a reservation of benefit being circumvented. The Court was unsympathetic, Carnwath LJ suggesting that the Revenue should look to the legislature rather than the Court, for a remedy if one was needed. The Eversden case has received press coverage, and no doubt the Revenue view that a tax avoidance opportunity has opened up will also receive publicity.

Advising clients, on the implication of the case, may not be entirely simple. First, it is necessary to recall the salient features. The deceased had owned a house, in which she and her husband resided. She settled a 95% tenancy in common, on trusts under which her husband enjoyed a life interest, and thereafter the trust fund (i.e. the 95% beneficial interest in the matrimonial home) would be held on discretionary trusts. Subsequently, the settlor’s husband died, but the settlor continued to live in the house, 95% owned by trustees who now held it on discretionary trusts. The original house was sold and another house purchased. It was accepted that the beneficial interests in the replacement house were owned in the same proportions as the house which had been sold i.e. 95% by the trustees, 5% by the settlor. The settlor then died and the Revenue sought to charge IHT, not just upon the 5% beneficial interest in the house to which the settlor was still entitled at the date of her death, but upon the entire value, including the 95% owned by the trustees. The Revenue’s argument was that the 95% interest held by the trustees had been the subject of a gift with reservation of benefit.