Chapter: 2 - Inheritance Tax Mitigation: The Basics

Overview of the Chapter - and the Subject

2.1

In 1986 IHT replaced Capital Transfer Tax (CTT), which itself had taken the place of Estate Duty in 1975. Estate Duty was primarily a death duty, but also caught certain lifetime gifts made within seven years before death (as indeed does IHT). The introduction of CTT sent shockwaves through both the professions and the public at large, in combining a genuine lifetime gifts tax with a death duty, together with a comprehensive regime for taxing discretionary trusts. However, the introduction of the potentially exempt transfer (PET) with IHT in 1986 went some way to mitigating the burden of the gifts tax. That year saw also the introduction of the reservation of benefit (GWR) regime, a revival from Estate Duty, in an attempt to prevent a taxpayer in making a lifetime gift from ‘having his cake and eating it’.

A variety of successful attempts to get round those GWR rules, as upheld in the courts, led to some piecemeal tinkering with the regime before the introduction of the pre-owned assets (POA) income tax from 2005/06. The POA regime imposes an income tax charge on donors of land, chattels or settled ‘intangibles’ who had managed successfully to circumvent the GWR rules while still enjoying a benefit from the asset given away. And then, in 2006, what was presented as the ‘Inheritance Tax Alignment for Trusts’ was in substance a concerted attack on both non-discretionary trusts existing at 22 March 2006 and new lifetime trusts, by making it generally rather more expensive in IHT terms to hold assets in trust than to hold them beneficially.  While the full consequences of this are still becoming clear as the impact of FA 2006 works its way through the system, the new regime quite evidently does not spell the death of trusts (as explored in Chapter 4).

This core Chapter of the Book surveys in brief the avenues down which a person wishing to mitigate the burden of IHT might walk, most of those topics to be expanded in subsequent Chapters.  First, however, it is worth saying something about the scheme of IHT as a whole as we now have it in IHTA 1984 (renamed in 1986 from the original Capital Transfer Tax Act 1984) and, for the GWR regime, FA 1986.  IHT having been introduced as a ‘new’ tax, albeit subject to some subsequent amendments, the scheme of the Act generally follows a fairly logical order.