Remember McKelvey v HMRC, back in 2008? Section 11 Inheritance Tax Act 1984 (IHTA) was put under the spotlight when a successful claim was made using the relief.
The deceased was terminally ill and, before she died, wanted to make provision for her blind, elderly mother. She gave her mother properties to allow her to fund her nursing care. The Special Commissioners held that the majority of the transfer was not a transfer for value under s11(3) IHTA.
It is easy to forget about the relief under s11 when advising clients, not only because of the passage of time since McKelvey, but also because the circumstances in which this relief is applicable are so rare.
The relevant section is s11(1) IHTA, which states:
’(1) A disposition is not a transfer of value if it is made by one party to a marriage or civil partnership in favour of the other party or of a child of either party and is –
The relief only applies to lifetime transfers, so an advisor will need to consider this relief if a client asks for advice on making gifts to their children if terminally ill or likely to die within seven years of making the transfer.
Consider the following scenario.
Forty-five year old Trudy is referred to her solicitor for advice on her Will and inheritance tax position. Trudy tells the solicitor that she has three months to live. She is separated from her husband but they are still married. (It is perhaps prudent to point out that, if Trudy were divorced and single, the relief would not be available to her at all. But, if she were divorced and had remarried, it would.) She owns a property and is modestly wealthy in her own right. Her husband is also wealthy in his own right and there is no risk of a claim against her estate from him. Together, they have a 16-year-old son, Sam, who is currently at school and may go to university. Trudy would like the entirety of her estate to pass to Sam.
There is a tax-planning opportunity here. Ordinarily, the entirety of Trudy’s estate would be taxable after applying the nil-rate band (NRB), but she could make use of s11 if she makes a transfer to Sam in her lifetime. The solicitor could be negligent if they fail to advise Trudy of this option.
Trudy’s solicitor spotted the opportunity and advised Trudy accordingly. But would Trudy want to make a gift to Sam to be held on bare trust until the end of the year in which he reaches 18? Is Sam financially mature enough to manage large amounts of money? If not, Trudy could make a gift into trust instead.
To benefit from the relief, the trust would have to be worded so that Sam would either become entitled to the funds at the end of the year in which he reaches 18 or when he ceases full-time education. Trudy may not want this either, as she may think it will influence Sam’s choices about his further education and she may not want him to have the option of receiving a lump sum before he is 21. She would also need to accept that it will be a settlor-interested trust, and any tax complications which arise from this.
Trudy would have to consider what would constitute maintenance. She would have to try to work out what Sam would need for university fees, accommodation and necessities, such as food and clothing, and try to maintain him at the standard of living appropriate to her dependant. This will be tested by HMRC and could complicate the administration of the estate. Would Trudy want this uncertainty?
Although advisors should remember the relief, the complications in a situation such as this may deter its use by all but the most tax-averse clients.