GIVEN THE INCREASE in property values, frozen IHT thresholds, and increasing scrutiny of trusts and estate planning by HMRC, more estates than ever are being pulled into the IHT net. One common strategy for reducing Inheritance Tax (IHT) is putting property or savings into trust. Done correctly, it can remove assets from an estate entirely, helping families reduce their exposure to tax on death. But where the arrangements are poorly implemented or the settlor remains involved, things can go badly wrong.
In today’s Shipleys Tax brief, we look at a recent Tribunal case which highlights a common – and costly – trap in inheritance tax (IHT) planning and to how to avoid this. HMRC successfully argued that over £440,000 in trust assets remained taxable on death — despite IHT planning documents suggesting otherwise. The case serves as a warning on how easy it is to fall foul of IHT rules, even with well-intentioned planning and where the practical impact of the planning is not fully thought through. With further reforms under discussion, it’s likely that reliance on informal or outdated planning will face even greater challenge from HMRC.
One common strategy for reducing Inheritance Tax (IHT) is putting property or savings into trust.
The Plan
Many individuals put property or savings into trust thinking it will reduce the value of their estate for IHT purposes. Done correctly, this can work in many cases. But done carelessly – or worse, informally – it can unravel years later, with substantial tax implications.
In essence, that is exactly what happened in a recent case before the First-tier Tribunal, where a family’s well-meaning trust planning failed to exclude over £440,000 from the estate. Despite trust documents stating the assets had been given away, the deceased’s continued involvement meant HMRC was able to include them in the death estate – unfortunately triggering a significant IHT charge after death.
A Family Trust
Back in 2000, Mr Mohammed Chugtai effectively set up two trusts, one covering a semi-detached property and shop, where his daughter lived – and the other covering a bank account into which rent and other income was paid.
In the trusts his children were named as beneficiaries and Mr Chugtai gave up all rights to benefit from the assets. But as it turned out, the reality didn’t quite reflect the legal paperwork.
Over the next 17 years, Mr Chugtai continued to live in the property, ran a retail business from the shop, and used the trust-held bank account to pay personal and household bills. Even a personal tax bill was settled from that account. When the shop was eventually rented out, the income was declared on his personal tax returns – not by the trust.
Despite trust documents stating the assets had been given away, the deceased’s continued involvement meant HMRC was able to include them in the death estate
Although his motivation was to care for a vulnerable daughter – and no one disputed the family circumstances – HMRC took the view that he never truly gave up benefit of either asset. Unfortunately for the Chugtai family the Tribunal agreed.
Why It Went Wrong
This case is a textbook example of what can go wrong when Inheritance Tax Planning is implemented without full and careful follow-through. While the legal structure appeared sound on paper, the deceased continued to behave as though he still controlled and benefited from the assets.
The Tribunal focused on what happened in practice:
- Was rent paid for living in the property?
- Why utility bills and council tax were paid from the trust-held account
- Income and savings continued to flow through the trust-held account.
- The deceased used the shop for business purposes and later for rental income.
The trust deeds clearly excluded him from benefiting. But the Tribunal was clear that actions speak louder than words and hence superseded the legal paperwork.
This case is a textbook example of what can go wrong when Inheritance Tax Planning is implemented without full and careful follow-through.
The judge even commented: “Fine words butter no parsnips” – meaning that well-drafted documents are irrelevant if they’re not matched by practical action.
The Bigger Problem: Common Tax Traps
Cases like this are more common than many realise. Clients often set up trusts with the right intentions but fail to separate themselves from the assets. This might be for practical reasons – ease of use, reluctance to let go of control, or simply not realising that everyday behaviour can have tax consequences.
Even helping a family member can become problematic. The Tribunal acknowledged that Mr Chugtai’s primary reason for returning to the property was to care for his daughter, but that, unfortunately, motive is not a defence when assessing tax liability. The benefit to him – free accommodation, access to funds – was sufficient to render the planning ineffective.
How to Avoid This Hidden Tax Trap – Basics
Inheritance tax planning using trusts can be very effective. But it must be implemented carefully and consistently. Here are some key issues to be aware of:
- Giving up ownership is not enough – you must also give up control and benefit.
- Using the same property or account after gifting it can undo the planning.
- Trust records, accounts and tax returns need to be maintained properly.
- HMRC looks at what actually happened – not just what’s written in the deed.
There are legitimate ways to mitigate IHT even where the donor continues to have some connection with the asset – but these require clear planning and robust documentation.
In this case (and with the benefit of hindsight), there were better alternatives that might have achieved the family’s goals, preserved care for the daughter, and reduced the IHT burden – but they were not followed.
Inheritance tax planning using trusts can be very effective. But it must be implemented carefully and consistently.
Final Thoughts
This case is a cautionary tale for clients and advisers alike. It shows how even well-intentioned inheritance tax planning can backfire if the legal form isn’t matched by practical substance.
Trusts remain a powerful tool for wealth protection and estate planning – but they demand attention to detail, proper administration, and a genuine transfer of benefit and control.
In some cases, personal or family circumstances can change significantly over time, making it difficult — or even impossible — to implement the original advice as intended. In such situations, it’s vital to seek timely follow-up advice to ensure the planning remains effective and compliant
If you’re considering using trusts in your IHT strategy, or if you already have one in place, now is the time to review it. The cost of inaction – as one family learned – can run into hundreds of thousands.
For further assistance or queries, please contact us.
Leeds: 0113 320 9284 Sheffield: 0114 272 4984
Email: info@shipleystax.com
Please note that Shipleys Tax do not give free advice by email or telephone. This article is intended for general information only and does not constitute tax or legal advice. Clients should seek professional guidance before making any decisions.
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