The GAAR advisory panel has released an opinion on arrangements involving the extraction of value from an estate using a loan to purchase an interest in a trust which the personal representatives argued had the effect of reducing the value of the deceased’s estate for IHT purposes.
In a complex series of arrangements involving a Guernsey trust and lender, the loan was used to fund an interest in the trust. On her death, the principal interest in the trust (a discretionary right to the income and capital of the trust fund) passed to her PRs. She had failed to exercise an option over a second interest which would have given her the full benefit of the trust. Her estate owed the lender £900,000 at that point, which her personal representatives argued reduced the value of her estate accordingly.
In considering the implications of that loan, the panel noted: ‘the borrowed funds were used to buy something that passed to the Deceased’s daughters on the Deceased’s death, seemingly without that value ever actually being in the estate and with the loan balance still outstanding to reduce the value of the estate. That suggests to us that the result is not consistent with the principles of the IHTA.’
The panel found that the circumstances in which the loan had been taken out, various transactions relating to the acquisition of the interests in the trust, and the way the options had been set up, appeared ‘contrived or abnormal’.
The opinion also considers example D30 in the formal GAAR guidance which catches arrangements which use trust interests that are excluded property. The PRs argued that the GAAR would not apply to the arrangements in the reference, because they did not seek to use excluded property. Dismissing this line of argument, the panel disagreed that example D30 signified HMRC’s acceptance of such arrangements.
This opinion also provides an example of how the panel is required to exclude arrangements set up before the GAAR rules came into being in 2013. In forming its decision, the panel appears to have taken great care to exclude such steps from its reasoning.
The GAAR advisory panel has released an opinion on arrangements involving the extraction of value from an estate using a loan to purchase an interest in a trust which the personal representatives argued had the effect of reducing the value of the deceased’s estate for IHT purposes.
In a complex series of arrangements involving a Guernsey trust and lender, the loan was used to fund an interest in the trust. On her death, the principal interest in the trust (a discretionary right to the income and capital of the trust fund) passed to her PRs. She had failed to exercise an option over a second interest which would have given her the full benefit of the trust. Her estate owed the lender £900,000 at that point, which her personal representatives argued reduced the value of her estate accordingly.
In considering the implications of that loan, the panel noted: ‘the borrowed funds were used to buy something that passed to the Deceased’s daughters on the Deceased’s death, seemingly without that value ever actually being in the estate and with the loan balance still outstanding to reduce the value of the estate. That suggests to us that the result is not consistent with the principles of the IHTA.’
The panel found that the circumstances in which the loan had been taken out, various transactions relating to the acquisition of the interests in the trust, and the way the options had been set up, appeared ‘contrived or abnormal’.
The opinion also considers example D30 in the formal GAAR guidance which catches arrangements which use trust interests that are excluded property. The PRs argued that the GAAR would not apply to the arrangements in the reference, because they did not seek to use excluded property. Dismissing this line of argument, the panel disagreed that example D30 signified HMRC’s acceptance of such arrangements.
This opinion also provides an example of how the panel is required to exclude arrangements set up before the GAAR rules came into being in 2013. In forming its decision, the panel appears to have taken great care to exclude such steps from its reasoning.
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