News & Bulletins
Thousands of families are hit by inheritance tax
setback
Daily Telegraph Saturday 14th April 2007
By Christine Green
A number of clients will have seen the disturbing headline in
Saturday's Telegraph concerning the decision of the Revenue’s
Special Commissioners in the above matter.
At first blush it seems like another victory for the Revenue in
their attack on Inheritance Tax saving measures devised by lawyers
and tax planners. The Telegraph article states that over 500,000
people will be affected by the decision. However, behind the
screaming headlines, this may not be such a wide-reaching decision
as has at first been suggested and, at least for the moment, does
not necessitate a rewriting of Wills.
The case centres around the use of the “loan clause” in Wills.
This clause has regularly been used in Wills which contain a Nil
Rate Band Discretionary Trust where it is envisaged that a share of
the family home will make up the Trust fund. The title to the house
is severed as between husband and wife and on the first death, the
Trustees of the Nil Rate Band Trust accept an IOU or a charge to
the value of the Nil Rate Band from the surviving spouse, secured
against the half-share of the property. This is regarded as
preferable to the Trustees holding an actual share of the house.
Where the Trustees hold a share in their own name, they will not
qualify for principal private residence relief for Capital Gains
Tax on the eventual sale of the property and there may be a danger
that the spouse who continues to occupy the house as their main
residence has acquired an interest in possession.
In the case in question, Mr Phizackerley had been an Oxford don
whose wife did not have a paid job during the marriage. The couple
bought a house in joint names in 1992 when Mr Phizackerley
retired.
Mrs Phizackerley died in 2000, leaving a Nil Rate Band
Discretionary Trust. Her husband gave an IOU of £150,000 based on
the value of Mrs Phizackerley’s half-share of the house. On his
death, his executors argued that his estate should be reduced by
the value of the debt of £150,000 arising in relation to the Nil
Rate Band Trust.
The Revenue sought to challenge this deduction under Section 103
of the Finance Act 1986 which provides that a liability shall not
be deductible to the extent that consideration given for the debt
consists of property derived from the deceased.
The Revenue argued that since Mrs Phizackerley had not
contributed financially to the original purchase of the house, the
transfer to her of a half-share in the property by her husband must
have been a disposition by him and therefore on his death, the IOU
was non-deductible, having originated from his own funds.
The case was argued for the executors by James Kessler QC, a
leading wills draftsman, and proponent of the loan clause. He
argued that Section 103 did not apply here because the transfer of
the half-share was for the maintenance of Mrs Phizackerley and
under Section 11 of the Inheritance Tax Act 1984 a disposition is
not a transfer of value if it is made by one party to a marriage in
favour of the other party and is for the maintenance of the other.
The maintenance argument did not find favour with the Special
Commissioners and the taxpayer lost the appeal in this
instance.
Practical Points for Clients
- Most practitioners would not use the IOU scheme as a way of
securing the debt. It has long been regarded as dangerous because
of the possible Stamp Duty Land Tax charges on the IOU and for this
reason the charge has been preferred as a way of securing the debt.
The charge does not carry the risks involved in the Phizackerley
case and does not create a liability to Stamp Duty Land Tax.
- The problem does not arise until the first party to a marriage
dies and therefore there is no need to change your Will at present
if it includes a recently drafted nil rate band trust and loan
clause. If it appeared that the loan clause was unsound we would
simply use a different method of setting up the Nil Rate Band
Trust.
- The problem in the Phizackerley case only arose because Mrs
Phizackerley had made no financial contribution to the marriage and
was the first to die. In cases where the party who has financially
contributed dies first, Section 103 is not relevant and there is no
problem.
- The case may have been wrongly decided and may be overturned.
The finding that Mrs Phizackerley had made no financial
contribution to the marriage and was therefore not entitled to a
half-share of the property in her own right would seem to
contradict the principles laid down in numerous matrimonial cases
where spouses receive a significant portion of the estate
regardless of contribution.
- Ominously, this case may represent the first challenge by the
Revenue to the loan clause, which has become a well-established
feature of Will drafting, and we may need to adapt the wording of
our Wills to deal with this.
WATCH THIS SPACE ……………
Date:
April 2007
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