Posted on 17th April 2007

CLIENT ALERT - Recent IHT Ruling on Discretionary Trust Wills

Case of Phizackerley v- HMRC The decision of the Special Tax Commissioners (the body which handles disputes between the Revenue and Taxpayer) reported in many of the National newspapers last weekend has understandably caused concern for Clients who have already created Discretionary Will Trust arrangements with a view to mitigating Inheritance Tax (IHT). The decision has not removed the benefit and advantages of these arrangements for the majority of clients. Where Discretionary Will Trusts are in place, on the death of the first spouse the deceaseds interest in the family home has often been used to settle the legacy to the Trust although in recent years more commonly the deceaseds interest has passed to the surviving spouse, in exchange for what amounts to an IOU under a charge arrangement. In the Phizackerley case 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 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, Doctor Phizackerley had apparently funded the property purchase. His wife, who had predeceased him, had not worked or contributed financially to the purchase/mortgage and therefore, under Section 103 the debt which his Executors claimed reduced Doctor Phizackerleys estate was not deductible in terms of computing the value of his estate for IHT purposes. Had Doctor Phizackerley died before his wife the Section 103 problem would never have arisen. Happily The Daily Telegraph and The Sunday Times reported that Discretionary Will Trust arrangements are still well worth setting up under Wills. At Latimer Hinks we are alert to and have been well aware of the Section 103 trap and have ways to structure Wills and make arrangements to ensure that the Phizackerley problem should not arise. 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. To emphasise, Discretionary Will Trusts do work and have great benefits and advantages particularly in terms of IHT saving (currently it is possible to save 120,000 where a couple have a joint estate of 600,000 and have made no lifetime gifts). If Clients have any issues or wish to discuss their particular circumstances or concerns then please do not hesitate to contact us. Please note: This fact sheet is only intended for guidance and is not represented as definitive work. No responsibility for loss occasioned/costs arising as a result of any act/failure to act, on the basis of this Fact Sheet can be accepted by Latimer Hinks. 16th APRIL 2007 Latimer Hinks, 5 8 Priestgate, Darlington, DL1 1NL. Tel: 01325 341500 Fax: 01325 381072 Web: