Questions of Cash: The way for couples to avoid inheritance tax is barely open

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The Independent Online

Q I read that the Inland Revenue lost the Eversden case in the Appeal Court ("Brown may close loophole after inheritance tax defeat", 16 May 2003), on the use of defeasible life interest trusts you have written about before (William Kay column, 27 July, 2002; "How property owners can defuse the inheritance tax time-bomb", 28 September, 2002; and Questions of Cash, 3 and 17 August, 2002). What is the effect of this? JM, Edinburgh

This is an important issue for inheritance tax (IHT) planning, says Stephen Pallister, a tax lawyer and member of the Law Society's Wills & Equity Committee.

"The court's decision upholds a tax-saving scheme for married couples with estates above the £255,000 IHT threshold," he says. "Under the arrangement, spouse H who owns the family home gifts it to a trust where spouse W has an interest for life. After a short period, the life interest is cut down by the trustees and replaced by discretionary trusts for the couple and their children.

Spouse H can carry on living in the property without it being taxed in his estate on death. The loophole is there is no reservation of benefit for IHT. As long as spouse W lives for seven years, IHT is avoided altogether.

"The planning works for other assets, too. It seems a fair bet the Revenue will push the Government to close the loophole in this year's Finance Bill. There may be a very short window of opportunity still to implement Eversden-style planning before a change in the law. Expert tax and legal advice is essential."

Mark Estcourt, managing director of IFA Cavendish Young, adds: "The disadvantage of defeasible life trusts is that the house becomes liable to capital gains tax from the date of transfer, but given the slowing of growth in the property market it may be a good time to consider this."

Q When Royal & SunAlliance reduced its annual and terminal bonuses ("Royal & Sun cuts payout for third time in a year", 6 February, 2003) you stated that "a £50-a-month, 25-year endowment policy will today pay out £66,262". My 25-year endowment policy with R&SA, which matures in 2006, costs £25 a month, so by extrapolation it should mature at about £25,000. But my latest reprojection letter gives a projected payout of just £15,700, at R&SA's middle rate of growth of 4.75 per cent. TH, Leicester.

Your policy begins and ends later than the example used in our article. One effect of this is that your policy includes fewer years of strong stock market growth. That means your projected value is therefore much lower.

Q In November 2001, the Bank of Scotland agreed in principle a remortgage for me, with linked bank and mortgage accounts. It told me it would take a few weeks to process: instead it took two months although my existing mortgage was with BoS. The mortgage was completed in January 2002, but the mortgage advance was placed in a holding account. Then the advance, £103,000, was credited twice to my current account.

During the same period, several payments and credits were processed in error. I made repeated phone calls, but could never speak to anyone with the authority to resolve my problems. When I complained I was given £100 as a goodwill payment. I then referred my case to the banking ombudsman and the bank increased its compensation offer to £600.

Having lost confidence in BoS I applied to Virgin for a remortgage, which made me an offer. Virgin made seven requests to BoS for my title deeds and redemption figure and I made three phone calls and wrote one letter before it was sorted out.

I don't believe BoS is able to provide the support necessary to efficiently operate linked accounts. AM, Bristol.

A spokesman for Bank of Scotland said: "This was entirely regrettable. The handling of this was not close to the manner we would hope to achieve and the litany of errors was simply not acceptable. To your reader we can only reiterate our apologies for the level of service she experienced."

Q My mother is 76, recently widowed and will move out of her rented home. I will provide the capital for her to move into her own house. What is the most tax-efficient method for me to do this? RC, Doncaster.

Mark McLaughlin, of the tax adviser TaxationWeb, says: "Inheritance tax (IHT) is likely to be the main tax issue. A gift of property (or cash) to your mother will escape IHT if you survive at least seven years after making it. Should you die within that time, the extent of any IHT liability broadly depends on whether your estate, together with the value of taxable gifts made in the preceding seven years, exceed the IHT nil rate band, currently £255,000.

IHT of 40 per cent is potentially payable on anything over that limit. If your mother leaves the house to you in her will, the property will form part of your estate for IHT purposes. If your mother's estate, including the house, does not present an IHT problem, one possible solution would be to give your mother a life interest in the property through a trust deed.

You still need to survive at least seven years after making the gift, to avoid IHT. But, on your mother's death, the property could pass by trust to another beneficiary of your choice, or it could remain in trust for someone else's future enjoyment. Specific advice is recommended."

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