Articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional. Past performance is not a guide to future performance and may not be repeated. Capital is at risk; investments and the income from them can fall as well as rise.
Following his recent death, there has been some recent press speculation over the inheritance tax planning that Tony Benn may have carried out to reduce death duties on his estate. From what we have read in the National Newspapers, it would seem that far from Mr Benn carrying out aggressive tax avoidance, he (and his wife) carried out sensible and acceptable tax planning to reduce the impact of inheritance tax.
It would seem that in the late 1990s, Mr and Mrs Benn owned and lived in a valuable private residence in West London. It would seem that the couple owned this property as tenants-in-common. This meant that, on the first death, the survivor would not automatically inherit – as would be the case if the property was owned as joint tenants. Instead, the first to die is able to leave their share of the property to whoever they wish.
In the event, Mrs Benn died first and it was reported that she left her share of the property to their children. This meant that the value of this share would be a chargeable transfer for IHT purposes but if it fell within her available nil rate band (£234,000 when she died) it would not give rise to any actual liability to IHT.
The effect of this would be that:
• The share that had been gifted to the children on Mrs Benn’s death would be outside of Mr Benn’s taxable estate for IHT purposes.
• The share that Mr Benn continued to own (and all of the other matrimonial assets) would be inside Mr Benn’s taxable estate for IHT purposes – but he, of course, would still have his nil rate band available to offset against this value on his death.
Therefore, there would have been an effective saving of IHT on Tony’s subsequent death – although, of course, since this planning took place the concept of the transferable nil rate band has been introduced. Despite this, it would seem that Mr and Mrs Benn’s planning would have been advantageous because it would seem very unlikely that any increase in the value of the nil rate band would have kept up with house price inflation in West London.
As Mrs Benn made the gift of her interest in the house on her death, the fact that Tony continued to occupy the house as a residence would not give rise to a gift with reservation of benefit because he could occupy rent free by reason of him owning a half interest in the property. (The article in question states that he would have to pay a market rental for his occupation but, given that Tony hasn’t made a gift, we do not believe this to be a requirement). Moreover, there would have been no CGT implications on the bequest of the property under each of their Wills because of the fact it was their principal private residence (and the bequest occurred on death when CGT does not arise).
The only real drawback with such planning is control. Following his wife’s death, Tony only owned 50% of the property and so, to a degree, would rely on his relationship with his children remaining good if he wished to stay in the property. As joint owners his children could have forced a sale and, of course, in such circumstances, Tony would only get 50% of the sale proceeds.
To avoid the lack of control aspect, people have in the past used a discretionary Will trust as a receptacle for the half share on the first death but this does bring with it a whole host of other tax implications – not least whether, if the surviving spouse is a potential beneficiary under the trust, he/she has an interest in possession or an immediate post-death interest which will neutralise any potential IHT advantages on the second death.
Also, of course, these days, as we mention above, the introduction of the transferable nil rate band means that the nil rate band of the first spouse to die is not totally lost if it is not used at that time.
The upshot of all this is that the planning carried out by Mr and Mrs Benn was not overly aggressive and was a reasonable way for them to each use their nil rate band – provided of course they could rely on their children! For those who want more control over what the children can and can’t do, a trust can be useful. But, as we say above, that brings with it other layers of tax complications.