The General Anti-Abuse Rule (GAAR) Panel has issued its opinion on an Inheritance Tax scheme which utilised a loan and options. The scheme claimed to transfer value with no IHT consequences and left the estate with a significant loan debt.

The GAAR Panel was asked to consider planning under which:

  • In March 2015, and shortly before their death, an individual formed a Family Trust with £10 in favour of their daughters.
  • The individual then borrowed £900k from a lender in Guernsey which was to be repaid within a year.
  • The funds were used to purchase an interest in a Wealth Preservation Trust (WPT) which was formed in 2012, by a separate settlor, and held £900k of assets.
  • The WPT had two ‘interests’. The First Interest was acquired by the individual for a consideration of £899k, the assignment for this interest provided that on the death of the individual, the First Interest would pass to the daughters.
  • Options were granted in respect of the Second interest. An option was granted to the individual and to the daughters.
  • These options were exercised such that the daughters as trustees of the Family Trust acquired the shares.
  • The individual did not exercise their option over the second interest before their death.
  • As the individual had not founded the WPT, they could not be the settlor of those funds, the planning claimed to:
    • Have removed £900k from the individual’s estate without an IHT impact.
    • Left the estate with significant debt.

The GAAR panel decided that neither entering into nor carrying out the tax arrangements was a reasonable course of action as:

  • The tax principles are that IHT is charged on transfers of value and the value of an estate at death.
  • The use of a loan to purchase something that passes to the daughters with no purported tax effect was inconsistent with those principles.
  • The making of the loan from the Guernsey Lender was contrived and abnormal as:
    • The lender was also involved in funding the WPT.
    • The loan had strict terms in respect of its usage.
    • The loan was taken out shortly before the death of the individual.
    • The repayment terms of the loan and the interest charging provisions had not been adhered to.
  • The way the acquisition of the First Interest bypassed the individual’s estate on their death was contrived.
  • The way the options were drafted and exercised, giving the individual no interest in the WPT was abnormal.
  • The arrangements did not obviously exploit a gap in the legislation.
  • The creation of the WPT in 2012, before the advent of the GAAR, was beyond the scope of the GAAR panel. They could only consider the events in 2015.
  • There was a mismatch between the economics of the transaction and the claimed IHT result.
  • The arrangements were not accepted as standard practice.
  • That the arrangements were different to examples in the GAAR guidance did not make them established practice.

Useful guides on this topic

General Anti-Abuse Rule (GAAR)
What is the General Anti-Abuse Rule (GAAR)? When does it apply? 

General Anti-Abuse Rule: GAAR at a glance (Freeview)
This note looks at the key features of the General Anti-Abuse Rule (GAAR) contained within the Finance Act 2013 and the basics of what you need to know about the provisions it contains when considering tax planning.

IHT: Loans and restrictions on liabilities against the estate
When are loans deductible from the estate on death? What restrictions are there? What anti-avoidance rules do I need to consider? 

External links

GAAR Advisory Panel opinion of 13 January 2023: Extraction of value from an estate, using options, by utilising property which is not excluded property for Inheritance Tax purposes

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