Winning the Final Battle: Inheritance Tax & War Pensioners.

War veterans can outflank the inheritance tax(IHT) trap

War veterans, including doctors and nurses - and even journalists - who were wounded or fell ill on active service could be exempt from inheritance tax if it can be proved after their death that they died as a result, even indirectly, of their injuries.

This little-known loophole means that many elderly survivors of conflicts could escape the IHT net.

Solicitor Peter Nellist at Clarke Willmott in Taunton, Somerset, has won back more than £400,000 plus £24,000 interest for the family of one client, a First World War veteran who died in early 2006. He is fighting three similar cases with the Ministry of Defence.

'Few advisers or solicitors are even aware of this exemption, so they don't inform clients,' says Nellist. 'To date, only a handful of relatives of ex-service personnel have managed to negotiate the tax refund. But it could apply to many now and in the future, including Gulf veterans and those who have been injured in Iraq and Afghanistan. It usually hinges on how a claim case is put together, so people should seek advice early.'

Nellist says ex-servicemen and women who have been wounded during active service should ensure their paperwork is watertight now, whatever their age. This will enable beneficiaries to be prepared and ready to fight an appeal with the MoD to get IHT refunded, if necessary. The tax must be paid first on the estate for the family to get probate.

Nellist adds: 'It is vital to pull together medical evidence and keep records. In many cases involving the World Wars, medical evidence may be lost, so veterans should prepare a detailed statement of wounds or diseases. Keep this statement updated and alert your family doctor to the issue. It is also vital to ensure that the death certificate records all causes of death.'

The unusual nature of the situation means it is impossible for any potentially eligible ex-servicemen and women to know whether their estate will be exempt from IHT before they die. This is an uncertainty that Second World War veteran John Burnand, 82, from Somerset, has to live with.

John Burnand in 1944
WOUNDED: John Burnand in 1944

John, who is married with three sons, served with the East Surrey Regiment in southern Italy in 1944, when he was 19. He had both his legs broken during a 'friendly fire' artillery barrage and then was also shot in the legs and left for dead by German soldiers.

He lay face down in mud for four days, drenched by rain, falling in and out of consciousness, before being picked up by another battalion. John's life was saved in hospital by penicillin shots every three hours for 15 days. During the next three months he suffered malaria, tetanus and eventually his right leg had to be amputated above the knee.

On his return to Britain in 1945, John was sent to hospital weighing only six stone. But he went on to get an economics degree at London University and had a successful 36-year career at ICI. However, he has always suffered mobility problems and back trouble as a result of walking with an artificial limb.

John still has shrapnel in his body - pieces were at one time removed from his kidney - and has suffered from severe deep vein thrombosis. He frequently suffers from ulcers on his legs and after a fall five months ago has taken to using a wheelchair.

With the help of Nellist, John has tried to ensure that should he die from a cause related to his war wounds, there will be no IHT to pay on his estate.

'When I heard about the possibility of a tax exemption I was keen to do all I could to try to help my family,' says John. 'As well as gathering my service number, medical evidence and compiling a written statement, I have spoken to my family doctor about the issue. I won't ever know if my case is successful, but I feel I have done everything I can to build a claim. I would urge other ex-servicemen to do the same. After death, it is difficult for their relatives to build a case.'

Nellist is campaigning for the same IHT exemption for on-duty police officers, civilians killed as a result of terrorism and soldiers killed in exercises immediately before active service and deaths due to or hastened by 'Gulf War Syndrome'. By concession, the exemption has been applied in the past to the estates of members of the Royal Ulster Constabulary killed in Northern Ireland.

Afghanistan & Iraq will swell the ranks of wounded heroes who can escape iinheritance tax

Full exemption from IHT for military personnel who die-even indirectly as a result of injuries or diseases suffered during active service could affect hundreds more families with the fighting in Iraq & Afghanistan.

But financial experts believe few military families know about the loophole and the Government is doing little to raise awareness. Military personnel who die on active service are always exempt from IHT. But under another, lesser-known tax rule, if death can be linked to a wound, injury or disease contracted on active service-even if that death is many decades later-the estate will be IHT exempt. This applies to all ex-service personnel, including doctors, nurses & drivers, as well as war correspondents.

IHT is charged at 40% on all assets in a person's estate above the £300,000 threshold. Assets always pass to spouses free of the tax so where a war veteran dies first, the IHT exemption will be lost.

Peter Nellist, a solicitor at financial planning firm Clarke Willmott in Taunton, Somerset, says: 'The death on active service provision as it is known applies particularly to veterans of the two world wars, who are now in old age and who may have significant assets. But it can also apply to UK Forces serving in Iraq & Afghanistan, who are either killed on active service orwho may later die, even in old age, as a result of an injury sustained on active service, or something linked to that injury. But few people are aware of what could be a valuable tax exemption.'

Army veteran Mark Jackson, 88, from Bridgwater, Somerset, learned of the IHT exemption after reading about it in Financial Mail last July. Mark, who has two grown-up children, was conscripted in 1939 and joined the Northumberland Fusiliers. A few months later he was transferred to the Argyll & Sutherland Highlanders.

As a machine-gunner, Mark was involved in the rearguard action at Dunkirk in 1940, but was wounded and taken prisoner. After years of hard labour at a sawmill in Sudetenland (the modern day Czech Republic), Mark was marched across Germany with other PoWs in January 1945.

He had to sleep in frozen farmyards and food was scarce. Many of his comrades died of starvation. Mark also suffered from beri-beri, which meant his ankles and feet became swollen, and he got ulcerative colitis. His
condition worsened after the war, while he was working as an accountant, until he had to have a colostomy.

Mark receives a war disability pension. His wife, Joyce, 84, a former civil servant, is still living so if Mark dies first, the potential IHT exemption will be lost. 'I don't know if the exemption will ever apply to me,' says Mark. 'But I think it's vital that more ex-servicemen are made aware of this valuable exemption. There is a moral issue at stake.'

The families of dead war veterans who paid IHT on an estate, not realising it was exempt, can fight to have the tax repaid with interest. A handful of cases like this have been won.

The Ministry of Defence grants the exemption rather than Revenue & Customs.

There is no time limit within which familiesmust fight exemption claims after a veteran's death,' says Nellist. 'Past cases have been won, but it can be more difficult to prove the link between the injury and death due to lack of medical evidence.'

Nellist says many financial professionalshave poor knowledge of the exemption.

Families who think the exemption may apply to them should take steps as soon as possible to gather documents, such as service number, details of any war pensions and information relating to military injuries or illnesses.

For cases during the World Wars, there is unlikely to be any official medical evidence so veterans should make a detailed statement. It is also vital for them to seek specialist legal advice and inform their family doctor of the situation to ensure the death certificate reports all causes of death.

The MOD does not publish statistics showing how many estates have been IHT exempt as a result of this law.

Jonathan Gocher, head of legacies at the Royal British Legion, says the government should raise awareness among ex-service commuminty. 'The numbers affected are small, but it would be good if more was done to inform veterans and their families,' he says.