Readers' forum - Equitas

I was a member of Lloyd's. I resigned several years ago and all my deposits have been repaid. There are no more post-cessation receipts to come. Would any income tax relief be available in the event of Equitas becoming insolvent or making a call for funds?
If I were to die now, would my estate have a deduction for inheritance tax and, if so, how would this be calculated?
I have a wife and adult children. I have already given away a substantial amount of money to my wife and made regular gifts out of income to the children. I do not wish to give away everything and therefore have to rely on the generosity of others in my rapidly approaching old age. Nor do I wish to give it to the Chancellor of the Exchequer or to American lawyers.
How do I achieve the best of all worlds?
Query T16,707                                            — Asbestos.

Reply by Tower:

There is a potential liability in the querist's estate, but the general principle for inheritance tax is that it must be valued as at the time of death. It is most unlikely that HMRC will allow anything to be deducted unless there is a significant likelihood that Equitas is about to make a call for funds at that time. As regards income tax, a payment to Equitas will be a post-cessation expense and would only be deductible from post-cessation receipts.
As regards inheritance tax planning generally, no details of the estate concerned have been provided and so only some general ideas can be set out here. The first and most obvious thing to look at is whether the querist and his wife have incorporated nil rate band trusts in their wills. This will at least enable both of them to use up their nil rate bands. Of course, it is hard to tell at this stage if this is a form of tax avoidance which the Government intends to end apparently by 2008. Tax avoidance seems to be currently defined as either anything which Government Ministers do not like or a relief which becomes too popular.
Strangely Ministers and HMRC do not seem to have anything against the insurance-based schemes. I would have thought that these were much more provocative and artificial, but of course the official tests for what is unacceptable avoidance are vastly different from even the harsh minority views of Lord Templeman. At present insurance schemes are acceptable. It does mean that one has to have cash available to invest in insurance products, or at least have investments which are not showing significant capital gains. The schemes enable an income to be retained by the taxpayer for a term of years, with the remaining funds being held for family members absolutely.
Other planning which is apparently acceptable and therefore has a decent chance of surviving beyond 2008 involves let property. Once again, one cannot fathom why let property is a good thing whereas stock exchange investments are a bad thing to use in planning structures, but all one can say is that all the current ranting about tax avoidance does not apparently apply to property-based schemes. What one can do is set up a trust structure within FA 1986, s 102B(3) which can enable the donor to retain the rents from the land, whereas most of the capital value of the property passes out of his estate.
Similarly, sharing arrangements in relation to a holiday home within FA 1986, s 102B(4) are still in the acceptable category. There has been a small amount of ranting from the Capital Taxes Office about these schemes, but only where the sharing is unequal. Here again, it is impossible to discern how the Government and HMRC are reaching their conclusions about unacceptability, because s 102B(4) says nothing about equal sharing whatsoever and it clearly embraces unequal sharing, such as division of the capital value into 10% retained and 90% given away. It will be a very comforting day when we revert back to a situation when the law is what matters.
Reversionary leases over the main residence are not considered by practitioners to be caught by FA 1986, s 102A, although once again HMRC has put these in the unacceptable category, notwithstanding the House of Lords seeing nothing wrong with them at all. In any event, they now give rise to liability to pre-owned asset tax, and it is therefore necessary to embellish the structure in order to deal with that liability; so one will be then straying into very provocative territory in HMRC's eyes.        

Reply by Brumus:

I suspect that the possibility of Equitas, a completely separate entity from Lloyds, becoming insolvent does not bear thinking about and the fact that this is 'a hypothetical situation' is the reason for a dearth of information. Presumably, we must look to general principles. HMRC changed its view regarding post-cessation receipts and expenses in 1999 and this is set out in the Lloyds Market Bulletin Y2100 (www.bulletins.lloydsoflondon.com/bulletins/mktcirc.nsf/mktBulletins/Y2100/$file/Y2100.pdf). This states that 'The Inland Revenue ... now consider that the only receipts and expenses that must be carried back to the final year of trading under the special Lloyd's rules are those items which have accrued before cessation. All other post cessation receipts will fall to be treated under the generally applicable rules'.
My first thought was that the liability would have been pre-cessation and could thus be set against the profits of (or increase the loss of) the final year's figures. But the third paragraph of the Bulletin states that 'the change of view means that it will no longer be necessary to re-open tax returns for the final year of trading at Lloyd's when former members receive refunds of members' special contributions made under Reconstruction and Renewal'.
As the transfer of liabilities into Equitas was part of  'Reconstruction and Renewal', I presume that any liabilities would likewise not be able to be carried back and could therefore only be relieved against any post-cessation receipts, which from the query seem unlikely to be received.
I do not see that any deduction would be given in the estate as no loss exists at this time and may not in future. This was foreseen as a problem in the distribution of estates — what would happen if a liability subsequently arose?
This was resolved to some extent in Re Yorke, Stone v Chataway [1997] 4 All ER 907, which held that personal representatives who relied on Equitas to cover a former Name's underwriting liabilities at the date of death were not acting unreasonably and could distribute the estate without retaining assets to cover possible liabilities. However, a personal indemnity from the recipients might be advisable and there is procedure for personal representatives. Tolley's Inheritance Tax 2005-06 includes a case study and useful information on this subject.
Regarding the potential inheritance tax liability, there is insufficient information to give detailed advice. For example, is the remaining estate in excess of the nil rate band? If not, there is no problem. If the estate is in excess of that amount, the simple solution is to leave assets equivalent to the nil rate band to descendants and the balance to his wife, although this may simply be deferring a liability until his wife's death, although if in excess of her needs this would allow some further time to make potentially exempt gifts from her to children, etc. during her lifetime.
I notice that gifts out of income were 'made'; can these continue and can use be made of the various minor reliefs and gifts to charities, etc. are also exempt. Do the assets currently held qualify for business or agricultural property relief? Can a discretionary trust be used? Coincidentally, HMRC have published a new online customer guide to inheritance tax (www.hmrc.gov.uk/cto/customerguide/page1.htm), but Asbestos should take detailed advice and a member of the Society of Trust and Estate Practitioners, who specialise in estates, trusts and related taxes, might be best placed to help him (see www.step.org). 

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