TT99: Inheritance Tax Planning Update

July 22, 2007

The death of estate planning using houses and will trusts…

There has been much inheritance tax ‘doom and gloom’ subsequent to a media storm about a tax case known as Phizackerley.

This case was about an Oxford don, Dr Patrick Phizackerley, and wife Mary who used their home as part of their inheritance planning in their wills, using a standard trust mechanism. The two of them owned the house, and on Mrs P’s death her half share was left to a ‘nil rate band” discretionary trust in her will. The trustees later transferred it to Dr P, who signed an IOU to say that he owed the trust the equivalent value of the half share.

Unfortunately HM Revenue and Customs (HMRC) applied anti-avoidance rules that had been introduced in 1986 and refused to allow the executors to deduct the IOU from the estate of Dr P when he died. They were able to do this because all the assets used in the structuring had originated from Dr P alone and he was the sole financial contributor to the family. The facts of the case were very unusual and it is not going to be appealed.

…has been greatly exaggerated

Despite the comments in the press, the Phizackerley situation is not going to apply to most couples who are married or in civil partnerships, and will trust structuring is still available when set up properly. Even if the position is similar to the Phizackerleys, there are still ways to plan without triggering these anti-avoidance rules. For example wills can include a ‘charge” structure rather than an IOU, or a second trust.

Barnes Roffe Topical Tips:

  • Most nil rate band discretionary trusts with a debt/charge scheme are still valid if drafted properly.
  • If the Phizackerley case may apply, your wills may need redrafting to include a charge mechanism or a special trust of residue.
  • If you are unsure about your situation you should review your wills in any event.
  • If you are married/in a civil partnership and do not have a structure of this type you may be missing a £120,000 inheritance tax saving at current rates.
  • There are many other useful planning mechanisms for inheritance tax using wills.

Consult your Barnes Roffe contact partner for guidance in this important area

Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.

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