IHT-Solutions

Phizackerley, the Revenue and the nil rate band discretionary loan trust

After a pleasant two week Easter holiday in Southern France, I have returned to the office to face the after-effects of the recently reported Phizackerley case and its effect on the workings of the nil rate band discretionary loan trust.

I knew something was up as soon as I turned on my e.mail and checked the inbox. I had a large number of e.mails from clients all effectively stating the same question which in synopsis can be stated as follows:-

I have read in the Telegraph, Daily Mail etc that a new case could make the nil rate band Trust in my Will ineffective. Do I have to change my Will?

It is gratifying that my clients do appear to have taken on board the type of Trust that they have entered into when they last changed their Wills. I am also pleased to confirm to them that in my original advice I tried to take into account the problem that has arisen in the Phizackerley case and as such it should require few, if any, clients to change their Wills.

The facts of the Phizackerley case are somewhat unusual and whilst it appears that the Revenue took an unfriendly stance towards the nil rate band discretionary loan trust scheme and won, it appears to me unlikely that many married couples will get themselves into the position that the Phizackerley family did.

I am indebted to recent commentaries of the case in my professional journals and particularly those of STEP (the Society of Trust and Estate Practitioners). In simple terms, it appears to me that the case will not apply, unless one party to a marriage has made a substantial gift of assets owned or earned by that party to their spouse. Thereafter, that spouse must predecease the donor and then the relevant gifted asset in whole or part must be loaned back to the donor under an iou created under the terms of a nil rate band discretionary loan trust.

Even, if you believe circumstances of this type could arise within your estate , it is still possible to make a fairly simple adjustment to your Wills to avoid the issue arising out of the Phizackerley case.

It can never be claimed that the nil rate band loan trust is a simple solution and without "beating my own drum" too much, their preparation is certainly a case where a professional with specialist knowledge should be employed.

Why inheritance tax is pro-marriage

In all fairness, I'm not sure that IHT is friendly to anyone but there are certainly strong advantages when it comes to IHT planning to be married or within a civil partnership than just being an unmarried couple.

The simple reason for this is that married couples* enjoy the benefits of the 100% spouse exemption to inheritance tax. This means that if a married couple* arrange and plan their affairs in good order they can both utuilise their full IHT nil rate band (£300,000 as from 6th April 2007) and defer tax in the event of the death of one party giving additional options for the survivor in respect of any balance of monies over and above the nil rate band.

Imagine a married couple* with a joint estate of £900,000 evenly distributed between the couple (£450,000 each). If one party dies, they can utilise Wills leaving a nil rate band discretionary loan trust in resect of the first £300,000 of the estate and the balance of £150,000 can pass to the surviving spouse tax free. At the very least the surviving spouse has the option to take further tax planning measures to alleviate their inheritance tax liability pending their own death.

Compare the same situation involving an unmarried couple. Again a nil rate band discretionary loan trust can be utilised to cover the first £300,000 of the estate but the remaining balance of £150,000 will be immediately payable at 40% leaving a tax liability of £60,000 to the surviving unmarried partner.

In numerous examples such as the one above, there are clear Inheritance tax benefits to be married* and in the unfortunate event that one partner in an unmarried relationship was seriously ill, the tax lawyer's first piece of advice would be to strongly consider getting married as soon as possible.

Of course, in previous posts, I have referred to the benefits of utilising a deed of variation to retrspectively change the terms of a Will for inheritance tax purposes. The power of the deed of variation does not, however, extend to retrospectively marrying an unmarried couple.

* also refers to civil partnerships