Barker Gotelee

Tax planning can be complicated.  What if it goes wrong and you want to undo it?

Two recent cases have allowed taxpayers to do just that and reverse gifts they made as part of their inheritance tax planning.  This is good news, especially for farmers and other businessmen.  Under certain circumstances, reliefs will exempt part or all of the value of agricultural and business assets from inheritance tax.  Giving these assets away could be sensible planning or a disastrous decision depending on the particular circumstances.

In the first case Mr Griffiths gave away an asset as part of sophisticated inheritance tax planning arrangements.  He died 14 months later and inheritance tax was assessed on the value of the gift.  Had Mr Griffiths lived for seven years from the date of the gift, no inheritance tax would have been payable.  Furthermore, had Mr Griffiths not made the gift at all, his widow would have inherited that asset and spouse exemption would have meant no inheritance tax would have been payable.

In most cases, it would not be possible to undo this gift - Mr Griffiths decided to make a gift and knew he had to survive for seven years. However, when he gave the asset away, Mr Griffiths was unaware that he had lung cancer and was unlikely to survive seven years.  Under the circumstances, the Court was persuaded that Mr Griffiths would not have given the asset away had he known about the state of his health.  The Court then used its discretion to reverse the gift. Consequently the inheritance tax payable following Mr Griffiths’ death was reduced.

In the second case, Mrs Bhatt inherited her late husband’s share of their home.  She was wrongly advised that inheritance tax would be payable on this and to avoid this she should give her husband’s share of their home to their children.

The Court agreed that Mrs Bhatt had made the gift under a mistake of fact as to the tax implications.  Accordingly, again the Court used its discretion to reverse the gift.

These cases show that where there is a factual mistake of ‘a sufficiently serious nature’, the Court has discretion to undo a transaction.  The Court will not exercise this discretion lightly, however, and will consider all the circumstances of each case, including any other motives behind the gift.  The Court will also of course consider the views of those receiving the gift and HMRC.

It is vital not to rely on escape routes of this kind.  The costs in both these cases will have been tens of thousand of pounds and the Court may or may not grant relief. It is much better to get good advice and get the tax planning right in the first place.

Nick Palmer

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