BPR and double dipping on first death

H dies with unquoted shares worth £3m, left in a specific gift, life interest to W and subject to that to son.

Residue to W, includes £6m cash and investments. She is elderly with a short life expectancy.

Son and W want to complete a DOV, so the shares go to a discretionary trust, excluding W as beneficiary, but including son’s issue for succession purposes.

Shortly after, W buys all the shares from the trust, and amends her Will to leave them to a discretionary trust. The plan is that on her death her trust sells the shares back to the first trust, accepting the risk the shares may have increased in value, in
which case the balance could then be held in trust for the son and issue under her Will trust.

If W survives 2 years after buying the shares, then £6m has left the joint estates free of IHT instead of only £3m. Also BPR is taken advantage of on the first death, in case BPR is reduced in the future, which would of course reduce the relief on W’s death
under the scheme. Life insurance can be taken out to cover the risk of death within 2 years after buying back the shares, so no BPR is available.

Have members tried such a scheme with success, and is it subject to GAAR or DOTAS?

Any other suggestions/warnings!!

Simon Northcott

If one leaves aside the fact that step 1 is intended to be incorporated within a variation, the arrangement is very similar to schemes a number of organisations promoted, whereby private company shares were settled into a discretionary trust with the intention that the settlor buy them back, albeit the arrangement was not necessarily documented at the time.

I recall these were withdrawn on the basis that they probably fell foul of GAAR. There may also be varying views to whether such an arrangement would be acceptable under the Code of Professional Conduct in Relation to Taxation (PCRT).

HMRC may also challenge the arrangement under the Furniss v. Dawson principle (often referred to as the “Ramsay principle”). It might therefore also be worthwhile looking at the judgment in Countess Fitzwilliam & Ors v Inland Revenue Commissioners; Inland Revenue Commissioners v Countess Fitzwilliam & Ors. [1990] BTC 8003, in which the taxpayers successfully challenged the imposition of the Ramsay principle.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

From a technical standpoint the plan seems to work, however we would issue some serious health warnings along the lines Paul has discussed - general anti-avoidance and Furniss v Dawson. I also wonder whether the DoV would fail due to consideration being given - if there is a commitment on the part of the widow to buying the shares and amending her will with an intention that her trust sells to the first trust then that could arguably constitute consideration.

Another point to consider is that when the trust created by the DoV sells the shares, it will have £3m cash which will then be subject to decennial charges and exit charges if for some reason the plan does not come to fruition.

Michael McCabe
Heath Square Private Client Limited

The plan may not survive scrutiny. The variation and share
sale may be two discrete rights that make an aggregate wrong.

1 Reading back for tax may not be secured. An attempted double
dip may end up as a single dip, or none at all although insured against, and with cost hassle and HMRC’s future wrath (the bad loser legacy). Establishment
hostility can only tolerate sub-optimisation of tax liability if adventitious; if planned it constitutes moral turpitude.

2 As a variation must be of the Will’s dispositions,
operating as a Saunders v Vautier
operation, it excludes the viable single dip alternative: formal exercise of trustees’
powers, of resettlement or appointment to W, with operative BPR by succession
to H, but retention of the shares in trust.

3 Surely the purchase price of the shares cannot be proscribed
“consideration” as being for the variation instead of or as well as for the
shares? A court will determine whether any concomitant cash transfer is
connected (Lau).

Prudently the price should be “£X or market value agreed
with SVD” to avoid a chargeable trust event/transfer by W as purchaser, depending
on who benefits from the “undervalue”.

4 Ramsay in 1981 gave
us “alternative fact” jurisprudence in tax. The (divinely revealed) prescriptive
formula for a series of transactions was, it turns out, an illusion. By 2004 (BMBF) we had become liberated from the primitive “literal” approach to statutory construction by the more subtle “purposive”, or by the even more sophisticated “contextual” (a
subliminal synthesis of both approaches with wide judicial discretion as to
admissible evidence of context). Or naked judicial legislation promoting huge uncertainty of

And judges are not constrained to reconcile or tidy the mayhem of the
real world consequences for the butchered actual transactions (e.g. the share
sale proceeds in Furniss belonged in law not to the judicially-identified “real” purchaser but to the interposed company).

So a Court could decide that the variation was “really” of
cash not of shares, causing an unwelcome IHT charge in the estate of H, an own goal as no BPR available (just as in Carreras the short-dated debenture was “really” cash).

SPI in
2004 seems to have left open the defence of “not pre-ordained” where a series step
is genuinely contingent, as in Craven v
If there is a “practical likelihood” of the share sale not occurring
it might be excluded from the context. The contingency must be so genuine that even a judge would recognise it.

5 The GAAR looks a threat. The plan could be an “arrangement”
to gain a tax advantage that might not pass the double reasonableness test.
While it might be a stretch to regard the share sale as “contrived or abusive”, it could contravene “policy principles or objectives” or “exploit shortcomings
in the provisions” and so be “abusive”.

A “just and reasonable” counteraction proposal to the taste
of the sub-panel could well be the single dip alternative in 2 above (as most likely:
Guidance, B 13.3). So W might achieve BPR personally by surviving 2 years but,
if not by 7, at the cost of a clawback of it in the trust at 40% less any taper

6 DOTAS cannot be ignored given the £5000 fine and the
short notice period. If the user is obliged to file form AAG3 it must be done
within 30 days of the variation (as where there is no UK promoter or a lawyer promoter
plus LPP).

An “informed observer” could well decide the special IHT
hallmark applied. The variation arguably effects a “relevant property entry charge”, at
least it would in the absence of reading back, though it is less clear that the share
sale is “contrived or abnormal”.

Ominously, example 16 in para 13.5 of the Guidance “might
be notifiable”. It is the single dip alternative, more or less.

The obligation to notify is not dependent on whether the arrangement
works, though that must affect the Tribunal’s view of reasonable excuse or the
amount of penalty, if not HMRC’s enthusiasm to seek one.

It does not prejudice the ultimately correct tax treatment
and may prove a benefit in disguise by engaging HMRC attention early on. A successful variation
with reading back does not increase the estate’s IHT and makes the DT acquire
as legatee for CGT. As separate elections have been abolished, the first
opportunity for HMRC to challenge a reading-back variation may properly arise only
some way down the track, when the trustees report a CGT disposal of the shares.

Jack Harper