High Court Puts Right £400,000 IHT Blunder

Even the most sensible attempts at tax planning can be undone by changes in the law and achieve the exact opposite of the intended objective. However, one High Court case has shown that, when inadvertent mistakes are made, the law can put them right.

A couple jointly owned a £1.4 million home. In the hope of achieving significant tax advantages, they transferred title to the property to the husband alone. Three days later, it was transferred again into both their names, but this time in their capacity as trustees of a settlement which was simultaneously established by deed.

Those transactions were carried out in ignorance of a Budget statement a few days earlier which heralded a change in the law and which meant that such settlements would in future be treated as chargeable transfers of value. The result was that the husband became liable for a substantial Inheritance Tax (IHT) liability at the 'lifetime transfer' rate of 20 per cent plus another 6 per cent on every tenth anniversary of the transactions. Far from saving tax, he ended up with an IHT liability of about £400,000. The mistake was not discovered until six years after the event, giving rise to late payment penalties and interest.

In coming to the couple's aid, the High Court agreed to rescind the transactions on the basis that a grave mistake had been made. They would not have been entered into but for the couple's lack of awareness of the Budget statement. The fact that the mistake related to tax was irrelevant and it was so serious in character that it would be unjust not to remedy it.

The ruling enables the couple to unwind the transactions so that the property will again be held in their joint names.

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