Trusts Did Not Benefit Family in £442k Inheritance Tax Case

CREATED BY HELEN BEAUMONT Published: 14/05/2025 @ 09:00AM #InheritanceTax #EstatePlanning #Trusts #TaxLaw #TaxPlanning

The recent case of Afsha Chugtai vs HMRC has significant implications for Inheritance Tax (IHT) legislation, particularly regarding trusts. The tribunal examined whether funds in two trusts qualified for exemption from IHT, ultimately concluding that they did not benefit the family as intended ...

The 'Afsha Chugtai vs HMRC' case serves as an essential teaching moment in the realm of inheritance tax and trust law

The complexities surrounding inheritance tax can often feel daunting, especially when cases revolve around the intricate nature of trusts and the stipulations of relevant legislation. A recent tribunal ruling, 'Afsha Chugtai vs HMRC [2025] UKFTT 00458 (TC)', has once again highlighted just how convoluted these matters can become.

In this particular case, the late Mohammed Chugtai's estate was scrutinised, leading to a disagreement between HM Revenue and Customs (HMRC) and his daughter and executrix, Afsha Chugtai, over potential inheritance tax liabilities.

At the heart of the matter was the interpretation of Section 102 of the Finance Act 1986!

This pertains to gifts with a reservation of benefit. While gifts made more than seven years before death are generally exempt from Inheritance Tax, this exemption does not apply if the donor continues to enjoy the property or retains some benefit from it. This legislation was key to HMRC's argument that the trusts, designed to reduce Mr. Chugtai's chargeable estate by £442,239, were invalid due to a retained benefit.

In a rather commendable move, the tribunal judges were eager to commend the legal representatives for their clear submissions. The legal battle underscored not just the intricacies of Inheritance Tax, but also the importance of how such cases are presented. For those seeking to challenge HMRC's findings, it highlights the necessity of presenting a robust case - complete with personal testimony and reliable evidence.

As it relates to the case, Mr. Chugtai had established two discretionary ‘interest in possession trusts’ in February 2000, aimed at benefiting his children. While the trusts were structured to exclude the deceased from benefiting from their assets, he returned to the Caversham property to care for a child with mental health issues, occupying the property without any evidence of paying rent.

In the eyes of HMRC, this was a clear indicator of
a reservation of benefit!

The agency contended that the beneficiary status of Mr. Chugtai's children could not take effect until it was demonstrated that they had genuinely assumed enjoyment and control of the trust property - criteria that were evidently not met based on the details provided.

The first point of contention arose from the assertion that the three beneficiaries had not assumed bona fide enjoyment of the trust property before the 26th February 2010. Alongside this, there were significant questions surrounding whether Mr. Chugtai was excluded from any benefit from the assets in the period leading up to his demise in 2017.

The tribunal was left with a comprehensive body of evidence that suggested the opposite - that Mr. Chugtai not only continued using the property, but had also employed the bank account associated with the trust for personal transactions, a scenario which undermined the very intention behind the setting up of the trusts.

The judges were unambiguous in their conclusion: “It is clear to us that the properties were not enjoyed to the exclusion or virtually the entire exclusion of the deceased.”

Counsel for the appellant proposed that Mr. Chugtai's motives for using the property were purely to care for his daughter, therefore contending that this did not constitute “enjoyment” in a conventional sense. However, the judges found this argument unsatisfactory.

They noted that the deceased not only occupied the property, but also used it for business purposes, along with receiving rent from the shop attached to the house. By continuing to manage the outcomes associated with the trust assets, Mr. Chugtai reserved benefits that blighted the estate planning efforts intended by the trust’s creation.

The tribunal also highlighted the means by which HMRC's arguments could have been countered effectively. A more suitable arrangement might have involved Mr. Chugtai paying full market rent for the property, which would have clarified the delineation of benefits between him and the beneficiaries. Such an approach would have reinforced the legitimacy of the trusts and potentially exempted the estate from inheritance tax.

The ruling serves as a crucial reminder for families
engaged in estate planning!

It conveys that without proper adherence to the rules governing trusts and the prudent establishment of circumstances that genuinely reflect the intent to benefit beneficiaries exclusively, the pursuit of tax advantages could have the opposite effect.

The 'Afsha Chugtai vs HMRC' case serves as an essential teaching moment in the realm of inheritance tax and trust law. Family estate planning can lead to unintended consequences if the intricacies of legal stipulations are not fully grasped and adhered to.

As the landscape of inheritance tax continues to evolve, this case stands as a stark reminder of the necessity for transparency and compliance when structuring trusts aimed at minimising tax liabilities. Families considering similar arrangements must remain vigilant - and perhaps seek expert legal advice to ensure they are navigating the intricate waters of inheritance tax successfully.

After all, inadequate preparation in such matters can result in significant financial repercussions.

Until next time ...

HELEN BEAUMONT
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About Helen Beaumont ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist. Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance. When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.

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