Two elderly sisters narrowly lost their battle in the European Court of Human Rights on 12 December to be treated in the same way as married...

Two elderly sisters narrowly lost their battle in the European Court of Human Rights on 12 December to be treated in the same way as married couples and civil partners for inheritance tax purposes. The case has attracted a lot of attention but was the decision fair?

The sisters, Joyce and Sybil Burden, have lived together in the UK all their lives and for the last 30 years in a house built on land inherited from their father. The sisters jointly own the property, which has been valued at ÂŁ875,000 and each leaves their share to the other under her will.

Under current UK tax law, the value of each sister’s estate together with the value of lifetime transfers made within seven years of death will be subject to inheritance tax at 40 per cent to the extent it exceeds the nil rate threshold, currently £285,000. As a result, the surviving sister will be left with a significant inheritance tax bill and as her home is her main asset she may have to sell it to pay the tax.

However, if a married or civil partnership couple leave their estate to the other they are entitled to an exemption which means no inheritance tax will be payable.

The sisters’ claimed that their relationship was similar to that of married and civil partnership couples and as such the difference in treatment amounted to discrimination under the terms of the European Convention of Human Rights.

The Court confirmed that a difference in treatment is permitted provided it can be objectively and reasonably justified or in other words because it has a legitimate aim. Although in tax matters, national authorities have a wide margin of appreciation when it comes to assessing whether a difference in treatment is justified. This is essential if a state is to be allowed to structure its taxation policies as it wishes based on the need to collect revenue and to reflect other social objectives.

The UK government argued that there was no true analogy between the sisters and married and civil partnership couples. The applicants were connected by birth rather than by a decision to establish a relationship recognised by law.

The government also submitted that the inheritance tax exemption for married and civil partnership couples purses a legitimate aim, namely to promote stable, committed heterosexual and homosexual relationships by providing the survivor with a measure of financial security after the death of the spouse or partner.

Four out of the seven judges agreed that the aim of the legislation could not be criticised and in pursing that aim, the government had not exceeded its margin of appreciation. Their conclusion was therefore that the difference in treatment was reasonably and objectively justified.

Whilst many may have sympathy with the sisters’ situation, a decision in their favour would have created a very difficult position for the government. Where would the new line be drawn? Would co-habiting cousins qualify for the same relief? What if the couple were young and how long would they have to live together? I expect sympathy would not extend to a large family choosing to live together in a stately home to avoid inheritance tax.

Despite these potential difficulties, three out of the seven judges disagreed with the majority decision. In a joint dissenting opinion of two judges they suggested that the Civil Partnership Act 2004 had changed the position:

“once the legislature decides that a permanent union of two persons could or should enjoy tax privileges, it must be able to justify why such a possibility has been offered to some unions while continuing to be denied to others.”

The judges believed that whilst it was appropriate to differentiate between couples that chose to enter into a formal union and those that did not, the fact that cohabiting siblings were denied this opportunity was not justified.

The problem of siblings living together was discussed at the time the Civil Partnership Bill was debated by government. The House of Lords proposed an amendment to the bill which would have permitted cohabiting siblings to have entered into a civil partnership. The House of Commons however rejected the proposal on the grounds that the Civil Partnership Bill was not the appropriate legislative base on which to deal with the problem. Arguably this would have fundamentally altered the purpose of the legislation, namely that of recognising couples in a committed homosexual relationship.

While a change to the Civil Partnership Act may not have been the right way to solve the problem, the dissenting judges felt that this had not absolved the government from addressing the problem.

They considered that the national legislature would be able to establish a high threshold for such unions and avoid fraud and abuse.

There is no doubt that the imposition of inheritance tax is not popular, and given the significant rise in house prices, it is no longer a tax that only wealthy families need to worry about. It is this general dislike of the tax that has generated the interest in this case and the sympathy for the sisters. There have after all, been many wealthy families faced with the same dilemma as the sisters in the past, forced to sell the family home or treasured possessions to pay their tax.

So was the decision fair? If the exemption is to exist a line must be drawn somewhere. It is not difficult, however, to envisage legislation that could recognise a relationship where a mutual dependency between two people who care for each other has been created. Having established such a relationship then surely it is only fair that the survivor of them has the same measure of financial security that a married couple or civil partners have.