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Introduction - What is Inheritance Tax?

This case revolves around the legal requirement that Executors make a declaration or return in respect of Inheritance Tax (previously generally referred to as 'death duties'). Such requirements were contained within the Finance Act 1999. Prior to the introduction of this Act there was no legal requirement for Executor's to declare at the date of death, gifts made in previous years.

There are several factors which will ultimately determine what if any gifts made over a lifetime should be included in such a return. Indeed, gifts made 7 years or more before death are totally exempt from Inheritance Tax and are thus never required to be included.

Many schemes exist and have been developed over the years to legally limit one's exposure to Inheritance Tax, such schemes are referred to as 'tax avoidance' measures. These schemes must not be confused with 'tax evasion' which is off-course illegal. The UK tax authorities in particular, constantly change the rules which apply to inherited property in an attempt to prevent tax avoidance measures being successful. For example, until recently there was never any requirement for tax avoidance measures to be pre-notified to the tax authorities, this has now changed with schemes now requiring to be approved in advance. It is clear that the UK tax authorities despise tax avoidance measures and will do whatever they can to get around them. This does not apply off-course if you are in Government with homes and interests abroad...one law for them and another for the rest of us?

See the Express Crusade against this vile tax for more information.

Tax Avoidance Measures - Trusts and Offshore Companies

Much has been reported over the years about Trusts and Offshore Companies leading to confusion and many misunderstandings. Trusts have been around for an extremely long time, in fact there have been Trusts in existence long before the Inland Revenue was ever conceived. A Trust is basically an arrangement put into place in order to protect ones assets for future generations. Offshore Trusts as far as the UK citizen is concerned are simply Trusts which are maintained outside of the United Kingdom and the jurisdiction of the UK tax authorities; although they would like you to think differently. Trusts can be set up anywhere in the world and are as simple to maintain as if they were located in the UK. Assets transferred or divested into a Trust are controlled and managed by Trustees acting on behalf of the ultimate beneficiary or beneficiaries. The donor derives no advantage or benefit from those assets after the Trust has been set up. This means that the The donor is no longer liable for any tax on these assets as long as he or she survives. On death, there is no requirement to declare any of the assets as long as a period of 7-plus years has expired since the Trust was set up.

It is also possible to create private offshore Companies in various jurisdictions and thereafter transfer ones assets into their ownership. In theory, the 7-year rule still applies in such cases but it is much more difficult to establish ownership especially where the beneficiary and the assets are both based abroad.

Offshore centres have specialised in such activities for many years. The British Virgin Islands is but one of these centres and offers confidentiality and security for such Company ownership. Assets so divested can be managed personally or with the assistance of professionals in virtually every area of commercial activity. Further confidentiality is ensured by using nominee directors and shareholders whose names then appear on all official documents. This arrangement is particularly suitable for British expats who choose to live and work abroad and so have zero liability to UK taxes. This arrangement is valid as long as one spends less than a total of 183 days in the United Kingdom in any tax year.

Historical Information relating to the case itself

It is within the background described above that we come to the case itself.

John was heir apparent to his late aunt (Mrs Annie Paul) and was so ever since his birth in 1954. There was never any doubt that John would inherit the greater part of his aunts estate. Ever since childhood, John had stayed with his aunt on many occasions at her farmhouse home near Bo'ness, West Lothian, Scotland and since the early 1970's accompanied her on many holidays and trips abroad.

In 1987 Mrs Paul encouraged John to leave Northern Ireland with his family and to settle near her home at Bo'ness. She was like a second mother to John and his own immediate family, John's own children referred to her as auntie.

When Mrs Paul's husband died unexpectedly in 1991, she was shocked to find out the extent of the Inheritance Tax bill which would be payable at the time of her own death in respect of their combined assets. The Bank of Scotland were at the time managing Mr Paul's share portfolio and were nominated as Executors and Trustees of his estate. She decided there and then that she would make her own arrangements in order to protect her personal assets from the grasping reaches of the taxman and so sought independent professional advice.

On that advice Mrs Paul entered into an agreement with an offshore Company in order that her own assets would be sheltered from tax after her death. Under the agreement she was permitted some discretion in the local management of her share portfolio although the beneficial ownership remained offshore. Accordingly, she engaged the services of the Bank of Scotland in 1993 with it being agreed at the time that the portfolio would be managed on the basis of Capital Growth and not dividend income. This was primarily in order to fulfil the requirement that no income be derived from the assets as long as she resided in the UK. Deriving such an income would invalidate the tax-exempt status of the agreement. The Bank negligently failed to discharge their responsibilities to Mrs Paul in that they generated dividend income contrary to what had been agreed. Mrs Paul was extremely angry and indeed furious at what had occurred with the bank and felt extremely let down by them. She terminated the services of the bank with John's assistance in April 1996 and arranged that all the share certificates be returned to her.

Mrs Paul briefed John as to what had occurred with the bank and availed of the opportunity that he then take over the assets as he would have inherited them in the future in any event. John took advice from several International Trust Companies and in due course transferred the entire asset under the ownership of another Trust Company based in the British Virgin Islands in order to maintain the offshore status. Contrary to what Crown Prosecutors had alleged in furtherance of the Inland Revenue's desire to set Inheritance Tax precedent, there was never any suggestion that John would manage the portfolio for his aunt or that he would be required to return it as in some sort of 'Indian Giver' arrangement. In this, John has always been supported by his entire family including his brother whom he was supposed to have defrauded. Ignorance of private family matters by Crown Prosecutors was no excuse for incompetence.

In November 1996, Mrs Paul granted John absolute Power of Attorney over her remaining affairs and installed him as sole Executor and Trustee in her remaining estate. She also changed her will in 1997 effectively sidelining John's brother Colin whom she had effectively fallen out with some time previously and with whom she had no wish to reconcile.

The Bank of Scotland's Involvement

There was no love lost between Mrs Paul and the Bank of Scotland after she so unceremoniously removed her entire Portfolio from their management; she had effectively dumped them! Two senior managers telephoned her at home at the time in a last ditch attempt to persuade her to change her mind, this unwarranted pressure was certainly not appreciated by Mrs Paul. In the event she was adamant that her nephew and heir John Lamberton was taking over the portfolio and that she no longer required the bank's services. The bank continued to act as Executor and Trustee in her late husband's estate at this time. Part of the Trustees duties was to ensure that Mrs Paul's home, in which she was life rented, was kept maintained to her satisfaction. In 1997 Mrs Paul requested the Trustees to carry out improvements to her home in order that she would be more comfortable in her retirement but they unreasonably refused. It was following this refusal that Mrs Paul invoked a clause in her late husband's Trust which stated that she could request any or all of the funds associated with the Trust. The bank certainly weren't going to relent on this occasion and refused to advance a single penny to her. The late Mr James Paul would most certainly not have been happy at the way his wife was treated by the bank, their actions would have been contrary to his wishes. Had Mr Paul not intended that such an advance and provision be made to his wife, he most certainly would not have included such within the Trust document. Mrs Paul was so enraged at the bank's attitude that she sought legal advice on how best to pursue the matter.

Unfortunately, before legal action could be commenced, John was devastated to find his aunt dead in bed at her home on 7th June 1998. Little did John know at that time what the consequences would be from this untimely event and how certain individuals would manipulate the facts in order to achieve their own sordid ends. It should also be noted at this point that the Bank of Scotland had no difficulty whatsoever in paying £405,000 from Mrs Paul's late husband's estate to the Inland Revenue some months after Mrs Paul herself had died! Now decide for yourself the moral of this tale and judge for yourself where the bank's priorities apparently lie!

Case History