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Debt charge arrangement success: Inheritance Tax

01 October 2007

B P Collins is pleased to announce that the Inland Revenue has accepted that the inclusion of both indexation and interest in their debt charge arrangement is valid and that only the latter will be subject to income tax.

Previously, the Inland Revenue had argued that the increase in the value of the debt charge arrangement, due to indexation, was subject to income tax. However, B P Collins took Counsel's advice and began including an interest clause in the debt charge. Counsel's view was that the interest would be subject to income tax and the indexation would be treated as a capital receipt.

In a recent test case involving the death of a surviving parent, the children decided to sell the family home and repay the debt charge that was set up on the death of their late mother (the first parent to die) together with the relevant indexation and interest. In the tax return that the trustees submitted the following April, the interest was declared as "gross income received" and the indexation uplift as "a capital payment received by the trust". A detailed explanation of what had been received was also included in "additional information" on the tax return.

The Inland Revenue accepted B P Collins' submission and, as a consequence, the trustees were required to pay £4,000 income tax on the interest, but the family saved approximately £28,000 of inheritance tax, which would otherwise have arisen within the surviving parent's estate, if the indexation had not been included in the debt charge arrangement.

Jeremy Mills, partner and head of the B P Collins private client practice group commented: "We are very pleased that the Inland Revenue accepted the logic of our comments and that this legitimate tax planning strategy will still be helpful to married couples and civil partners who wish to maximise their children's or other beneficiaries' inheritance, even though the nil rate band is now transferable between spouses and civil partners, particularly where house prices are likely to appreciate in value between the first and second death."

ENDS

Media Enquiries:
Samantha Howe
Marketing
B P Collins
01753 889995
samantha.howe@bpcollins.co.uk