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The spouse trap

This week, I am going to take a look at an absolutely fundamental part of the UK inheritance tax regime, namely, the fact that all transfers to UK-domiciled spouses are exempt from the tax.

A recent case heard before the Special Commissioners sought to effectively extend this beneficial tax treatment to cover the situation where the two parties involved are not legally married.

The case in point was Holland (executor of Holland deceased)

IRC and the facts were very straightforward. The appellant was not married to the deceased but they had lived together as husband and wife for 31 years before his death on April 17, 2000.

When they met in 1965, they were both married to other people but Mr Holland then separated from his wife and the appellant separated from her husband. Mr Holland obtained a decree absolute in 1974 but, when the couple intended to marry in 1993, Mrs Holland could not find her decree absolute and believed she could not remarry without this document.

In 1969, the appellant changed her name to Holland by deed poll and subsequently became known as Mrs Holland. In the following years, Mr Holland and the appellant lived together in all respects as husband and wife. They had two children and these children and most of their acquaintances assumed that they were married. Mr Holland provided for his family and took care of all the finances.

On his death, Mrs Holland claimed that the property which passed to her should be exempt from inheritance tax under s18 of the Inheritance Tax Act 1984 (the inter-spouse transfer exemption) but the Inland Revenue refused her claim. She appealed against the decision on various grounds, namely that:

•The word spouse was not restricted to those who were legally married but also included those who lived together as husband and wife.

•Her rights to respect for private and family life and to peaceful enjoyment of her possessions under the Human Rights Act 1998 were being breached on the grounds of discrimination.

•She was entitled to rely on this Act as, although it came into force on October 2, 2000, which was after Mr Holland&#39s death, this date was before the Inland Revenue&#39s initial refusal of her claim.

However, the Special Commissioners refuted all her arguments. Their view was that the meaning of a word had to accord with the understanding of the ordinary man using the word in its popular sense at the relevant time and the Commissioners&#39 view was that an ordinary man in the year 2000 would say the word spouse meant a man and woman who were legally married and did not include persons living together as husband and wife.

They also took the view that the Human Rights Act 1998 would not be relevant in this case as it came into effect after the death of Mr Holland.

But even if this had not been the case, the Commissioners&#39 view was that married persons are not in an analogous situation to that of Mrs Holland and that the difference in the tax treatment of transfers in these situations has an objective and reasonable justification. On that basis, there was no discrimination.

In many ways, this judgment was not a surprise but we may not have heard the last of it as Mrs Holland has been given leave to appeal direct to the Court of Appeal on this issue if she so wishes.

All sorts of human rights issues are now coming to the attention of the courts and it is perhaps inevitable that, sooner or later, issues surrounding our taxation system and its perceived discriminatory treatment of unmarried as opposed to married people will have to be clarified.

Of course, the other big issue in the area of potential discrimination relates to same-sex relationships. Whereas it could be argued that people in heterosexual relationships always have the option of getting married but simply choose not to, for whatever reason, this is simply not an option for people in same-sex relationships. Is the fact that they are thus unable to enjoy the tax breaks available to married persons discriminatory and in breach of their human rights?

We will have to wait and see. One thing is certain – this is a developing area of the law and one which I am sure we will hear more of in the years to come.


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