Estate Planning

Estate Planning

Scaremongering - Deborah Ward discusses the recent Phizackerly case.

Estate Planning

Recent speculation in the press has concerned people who have implemented "nil rate band" will trusts. However, the case which initiated these reports does not have as far reaching implications as the hype would have you first believe.

The Phizackerly case was a decision by the Special Commissioners for Tax which concerned an arrangement put in place by a married couple to attempt to mitigate their inheritance tax liability. In their wills, many couples (married couples or those who have entered into a civil partnership) simply leave all their assets to the survivor. If such a couple have assets in excess of the inheritance tax threshold, on the first death there is no inheritance tax to pay as assets passing between such couples are exempt from inheritance tax. On the second death, when calculating the estate liable for inheritance tax, the enlarged estate is taken into consideration. On the second death, the net estate is calculated and the inheritance tax allowance is deducted. Currently, the inheritance tax allowance is £300,000 rising to £312,000 in the next tax year. Therefore, in many cases inheritance tax is payable on the second death at a rate of 40% on the assets which exceed the inheritance tax allowance.

Nil Rate Band Will Trusts

Therefore when taking Estate Planning advice, couples may consider drafting their wills so that on the first death, rather than leaving everything to the survivor, they leave an amount up to the inheritance tax allowance into a discretionary trust and then the remainder to the survivor. These are sometimes referred to as "nil rate band" will trusts. This structure enables the inheritance tax allowance of both parties in the relationship to be utilised as the assets in the trust do not part of the survivor's estate.

Nowadays, the main asset of many couples is their family home - this is particularly so in recent years with the marked increase in house prices. Therefore, on the first death, the value of the asset which can be placed in the trust is quite often a proportion of the deceased's share of the family home.

Phizackerly

The issue that arose in the Phizackerly case was that on the death of the first spouse (the wife), a decision was taken not to place the half share of the family home into the trust. Instead, a scheme was entered into whereby the nil rate band trust legacy was satisfied by a loan/IOU. This meant that the husband placed into the trust, and the trustees accepted, a loan note instead of the half share of the house. The impact of this was that the husband obtained 100% ownership of the house with an IOU from the husband passing into the trust - the intent being that the amount of the IOU would be deductable from the value of his estate.

When the husband died and the value of his estate was calculated, his executors subtracted the value of the IOU from his estate assets. When looking at this matter, HM Revenue & Customs decided that the IOU/loan could not be used as a deduction against the value of his estate for inheritance tax purposes. Contrary to some of the press hype, it was not a general attack on nil rate band trusts. The case simply highlighted an issue which practitioners in the area had been aware of for many years, namely that pursuant to section 103 of the Finance Act 1986, for a debt to be deductible from a deceased's estate, the consideration of the debt cannot consist of property "derived from the deceased". On the facts of this case, as the husband had originally been the sole provider of the house, the share that the wife proportionally left and the IOU that arose from it was 100% "derived" from the husband and could not be offset. The reason why this caused an issue in this particular case was because of the specific facts surrounding the Phizackerly arrangement.

Advice

It has always been important when entering into any Estate Planning arrangements that specialist legal advice is obtained and this case highlights the importance of attaining this specialist advice on the first death to ensure that the nil rate band trust is constituted correctly so as to benefit from the inheritance tax mitigation that had originally been intended when drafting the wills.

Deborah is an Associate in the firm's Private Client Department specialising in estate planning, administration of estates and residential property.

Deborah can be contacted at: deborah.ward@lestrangeandbrett.com

Quote: enables the ..... allowance of both parties .... to be utilised