Last week, Kellie Williams-Jauvel, a partner in Morr & Co’s dispute resolution team, acted for a client who, during the course of some estate planning made what seemed to be a minor change to some of his investment plans held in trusts with Zurich. To our client’s dismay, the change he had made resulted in a tax bill of £126,000 payable almost immediately. He came to us to see if the mistake could be rectified, and the tax charge reversed.
A brief history of this matter is that our client, like many, wanted to ensure the tax efficient passage of his family’s wealth for a future generation, specifically his nephew. As part of that planning, he decided that he should gift his nephew some assets, held in a trust, during his lifetime.
Our client’s intention was to make the gift using the commonly referred to ‘7-year rule’ to potentially save inheritance tax on his death, the benefit being that if he made the gift now and survived for 7 years then his gift would be exempt from inheritance tax at 40%. He approached Zurich, where the investments were held, who made the process sound simple and gave him some forms to complete. For a number of reasons, which are beyond the scope of this article, he understood these forms would meet his objectives.
Unbeknownst to him, the appointments changed the nature of the trust in which his investments were held from an interest in possession trust to a discretionary trust. On a reading of the tax rules, it was clear that his actions amounted to a lifetime chargeable transfer for inheritance tax purposes resulting in an immediate tax charge at the rate of 20%. There was nothing our client could do to correct the mistake he had made, his pleas to Zurich falling on deaf ears.
The mistake was easily made but had expensive consequences. Our client was faced with a tax liability of more than £126,000, payable to HMRC within 6 months and no way to correct his mistake, so he sought our help.
How we resolved the situation
On our client’s behalf we prepared a set of legal proceedings asking that the court to reverse the actions he had taken on the grounds of mistake. The defendants were our client’s nephew and HMRC. The claim was heard before a judge in the Chancery Division of the High Court where the case pleaded was successful, restoring our client to the position he was in prior to the mistake being made. This saved our client over £126,000 in tax.
We worked quickly to resolve the dispute. From a first meeting with our client to a Court Order, it took just 9 months. Our client is now able to put this stressful incident behind him and make effective estate planning decisions going forward.