Posted on 2nd May 2007

IHT Trust Ruling - No Great Cause for Concern

Anne Elliott, partner at Darlington law firm Latimer Hinks, is reassuring people that Discretionary Will Trust arrangements are still well worth considering despite a recent ruling by the Special Tax Commissioners. The Special Tax Commissioners, the body which handles disputes between the Revenue and the taxpayer, caused concern for many people who had already created Discretionary Will Trust arrangements to mitigate Inheritance Tax (IHT) with its decision in the case of Phizackerley. Married couples and civil partners can pass their estates to each other free of IHT, but if the first to die passes everything to the other, their nil rate band for IHT is wasted and this can cost as much as 120,000 in IHT (where the couple together are worth 600,000 or more.) There are ways to mitigate the tax payable and one of these is a Discretionary Trust, where the first spouse to die leaves the first 300,000 worth of assets to a discretionary trust. The main asset of any couple is probably their house and the Phizackerley case involved use of the deceased wifes share in the home to settle the discretionary trust. The Phizackerley case involved an issue in respect of the deductability of a loan referable to the value of the wifes share, owed by the surviving husband to the wifes trust, the wife having died first. The decision was that the money owed by the surviving husband to the Trust set up by his wifes will did not qualify to reduce the value of his estate for IHT purposes after his death. The arrangement fell foul of the anti-avoidance legislation provided for in Section 103 Finance Act 1986. This was because although the property was owned in joint names, the surviving husband had effectively funded the property purchase. His wife had not worked or contributed financially to the purchase or mortgage and therefore, under Section 103 the debt which his executors claimed reduced the value of his estate was not deductible in terms of computing the value of his estate for IHT purposes. The scheme may have worked for the Phizackerleys if the husband had died first, or if the wife had paid for or contributed to her share of the house. Basically, the spouses died in the wrong order! Anne Elliott said: This decision has most certainly not removed many of the benefits and advantages of these arrangements for the majority of people. It is possible to structure wills and make arrangements to ensure that the Phizackerley problem need not arise. This case has attracted great interest and in the context of the contribution levels of spouses may be something which now needs to be taken into account. Nowadays however, most partners in a relationship have made some financial contribution. Phizackerley was a very special case decided on very special circumstances. It may be advisable for married couples to document the financial arrangements relevant to all property acquisitions throughout their married lives including all capital and mortgage payment contributions. Particularly, consult a specialist advisor who can help to negotiate the maze of tax rules and regulations. ENDS