Ingram Part 1: Inheritance Tax Planning and the family home

The Court of Appeal decision in Ingram and another v Commissioners of Inland Revenue (1997) STC sent shock waves through the tax planning professions, although of course, the case will undoubtedly proceed to the House of Lords.

This issue features two articles examining the case.

Firstly, Nick Hughes of Williams Jeffrey Barber examines the facts behind the case and provides an alternative solution.

Many will have noted the Court of Appeal's recent majority (2:1) decision in favour of the Inland Revenue in Ingram v IRC 1997 STC 1234 and will be concerned for those of their clients who have either already effected Inheritance Tax saving arrangements in connection with the family home or are contemplating doing so.

The purpose of this article is briefly to review the Ingram case, the basis of the decision and to consider an alternative solution which we believe can achieve the intended Inheritance Tax savings and is unaffected by the Ingram decision.

Ingram - the facts

On 29 March 1987, Lady Ingram transferred the freehold of her substantial property to her solicitor who immediately declared that he held the property as a nominee for her. On 30 March 1987, and at Lady Ingram's direction, her solicitor granted her two 20 year rent free leases extending to the entire property. Subsequently, on 31 March 1987, and again at Lady Ingram's direction, her solicitor transferred the property, subject to the leases, to family trusts.

It should be noted that it was because of the decision in Rye v Rye 1962 AC 496 (which held that an individual cannot grant a tenancy to himself) that Lady Ingram's solicitor was involved in the arrangements as her nominee.

Lady Ingram died on 3 February 1989.

Ingram - the arguments

The Inland Revenue contended that the gift of the unencumbered freehold interest to the family trusts was caught by the gift with reservation of benefit provisions contained in Section 102 of the Finance Act 1986 because the gifted property had not been enjoyed to the entire exclusion of Lady Ingram and of any benefit to her by contract or otherwise so that, as a result, the entire property should be treated as a fully taxable asset of her estate for Inheritance Tax purposes and valued at the date of her death.

More particularly, the Inland Revenue successfully argued that

the lease was invalid, following the decision of the Court of Session in Kildrummy (Jersey) Limited v IRC 1990 STC 657 (this case was decided after the Ingram arrangements had been implemented) which held that under Scottish law the grant of a lease by a property owner to his nominee (or by the property owner's nominee to the property owner) was ineffective;

because the lease was a nullity, the trustees of the family trusts received the property free from the leases although, because they knew of the leases, subject to Lady Ingram's equitable rights to enjoy possession of the property; and that

Lady Ingram's equitable rights did not arise until the property had been transferred to the trustees so that, as a result, Lady Ingram had reserved a benefit for herself.

The arrangements were therefore caught by the old Estate Duty decisions which held that where property is given upon condition that the donee grants back a lease to the donor, the property is not enjoyed to the entire exclusion of the donor.

For what it is worth, the dissenting judgement held that the Kildrummy decision had no application in English law.

The future

Although the Inland Revenue has heralded its success in the Ingram case as yet another victory in its battle to stem illegitimate tax avoidance, the decision nevertheless provides some comfort for the taxpayer. Had the leases not been invalid, and unless the Inland Revenue could have successfully invoked the Ramsay principle, it seems that the case would have been decided differently.

Therefore, the Estate Duty cases which established the principle that there is no reservation of benefit where the donor retains a benefit referable to a prior right rather than to the property given away, remain as valid as ever.

There is another carve-out arrangement which, as mentioned, we believe is unaffected by the Ingram case.

The deferred lease arrangement

This involves the granting of a deferred lease to another individual or, preferably, to a suitable trust.

Because the lease does not have effect until expiry of the deferred period, the donor can continue to occupy the house in the meantime. There is no reservation of benefit because the donor's right to occupy the house arises by virtue of the retained freehold interest.

The length of the deferred period needs to be considered carefully. The usual objective is to ensure that the donor can continue living in the house for the rest of his or her lifetime.

The effect of the scheme is to convert the donor's unencumbered property interest into an encumbered interest, in other words one which is subject to the lease. It therefore becomes a wasting asset and its value will decline as the operative date of the lease draws near.

The potential Inheritance Tax savings depend upon a number of factors, including how long the donor survives after the creation of the deferred lease, the Inheritance Tax rate, the length of the deferred period and the relevant valuations.

Even if the donor does not survive for seven years, there is usually some Inheritance Tax saving on the basis that the donor has converted what in most cases will be an appreciating asset into a wasting asset.

As with all carve-out arrangements, there is a Capital Gains Tax downside in that the property interest which is given away no longer qualifies for the principal dwelling house exemption. However, the Inheritance Tax savings usually considerably outweigh any potential Capital Gains Tax disadvantages.

Nick Hughes of Williams Jeffery Barber, Sceptre House, 169-173 Regent Street, London, WIR 8QH (Telephone: 0171 414 0400 Fax: 0171 434 1208).