15-05-2025
Family hit with £176k inheritance tax bill for making common mistake
A grieving family has been hit with a £176,000 inheritance tax bill after their deceased relative fell foul of 'gifting' rules.
Mohammed Chugtai gave away a property and a shop to a trust which was structured so that he could not benefit from the assets, meaning they should have been shielded from death duties when he died in 2017.
However, following the gift to the trust, Mr Chugtai returned to live in the home to care for his adult daughter whose mental health issues meant she could not leave the house.
Assets transferred as gifts are not excluded from the inheritance tax calculation if the person giving the gift is deemed to have subsequently benefitted from it.
Tax experts warned the 'gift with reservation of benefit' rule often catches out families where parents give their home to their children, but continue to live in it until they die.
At a first-tier tribunal hearing, Afsha Chugtai, another of Mr Chugtai's daughters and the executor of her father's will, insisted that Mr Chugtai had made these decisions seven years before he died, so the value of the trust should not have been included in his estate for inheritance tax purposes.
She also claimed that her father had no choice but to return to the property given his daughter's condition.
But HM Revenue & Customs (HMRC) successfully argued Mr Chugtai had benefitted from the property.
Cleo Lunt, HMRC's solicitor, cited a previous high-profile inheritance tax case in which the judge said: 'Not only may you not have your cake and eat it, but if you eat more than a few de minimis crumbs of what was given, you are deemed for tax purposes to have eaten the lot.'
Inheritance tax is usually paid at a rate of 40pc on an estate above the nil-rate band of £325,000, which rises to £500,000 if you are passing down a primary residence to a direct relative.
But the 'seven-year rule' allows a person to pass down money or assets tax-free or at a reduced rate up to seven years before death.
Placing an asset in a trust means you no longer own it, meaning it can be passed down tax-free after seven years if gifting rules are met.
The total value of Mr Chugtai's estate was £843,950, comprising a £380,000 property with an attached shop, £62,239 in a Santander trust account, along with £401,711 of assets.
Accountancy firm, Moore Kingston Smith, said that given the size of the estate, the Chugtai family's inheritance tax bill was likely to have been £176,896.
Claire Roberts, a tax partner at Moore Kingston Smith, said: 'The 'gift with reservation of benefit' rules are typically widely misunderstood and often catch people out.
'This case highlights the fact that regardless of motive and the terms of a trust deed, retaining any benefit whatsoever in an asset given away will cause the gift to fail for inheritance tax purposes.
'This is something of a cautionary tale to those who may be considering gifting in their lifetime – get it wrong and your loved ones could be landed with a costly tax bill on your death.'
