Trusts can be an invaluable means of providing for vulnerable loved ones, but they need careful handling by a professional if they are not to have serious unforeseen consequences. In a case on point, the High Court came to the aid of a retired GP whose misguided attempt to ensure long-term security for her disabled children threatened to saddle her with punitive and unnecessary tax liabilities.

The 80-year-old GP owned a quarter share in a 999-year lease of a building where she and her partners once practised and which was worth up to £1.5 million. She had made a will bequeathing that asset equally to her disabled son and daughter. She was, however, concerned that her children would be unable to cope with the property’s day-to-day management and agreed with two of her former partners that they would perform that role following her death.

On the advice of a legally qualified friend, whom she had known since her schooldays, she placed her share of the property in a trust which, whilst enabling her to continue taking the rental income from it during her lifetime, was meant to ensure its smooth transfer to her children when she died. Her friend informed her that her tax position would be unaffected by the setting up of the trust.

The friend’s advice that the creation of the trust would not amount to a disposal of the asset for tax purposes was, however, both out of date and plainly wrong. The execution of the trust in fact had grave tax consequences. It gave rise to, amongst other things, an immediate Capital Gains Tax liability of up to £50,000 and was likely to increase the amount of Inheritance Tax (IHT) payable on the GP’s death.

After she launched proceedings, the Court accepted that she had made a fundamental mistake in setting up the trust. She had done so in the false belief, based on her friend’s faulty advice, that the trust would not affect her tax position. The objective of the trust was not tax mitigation but to ensure that the property could be managed for her children’s benefit. However, it entirely failed to achieve that purpose and, far from conferring a benefit on the GP, it exposed her to wholly unnecessary and penal tax charges.

Ruling that it would be unconscionable and unjust to leave the mistake uncorrected, the Court rescinded the trust. The ruling meant that IHT would be chargeable in the ordinary way on the value of the asset when the GP died but that she would be relieved of the other unforeseen tax consequences of the trust.

Source: Private Client Library Content