The results of the Phizackerley test case on the issue of Inheritance Tax and nil-rate band will trusts, is just the start of a "long war" with HM Revenue & Customs on the subject of tax planning, claims the Royal Bank of Canada.
In February the Special Commissioners ruled in favour of HMRC in the test case on the basis the amount of money – approximately £153,000 – Dr Phizackerley owed to the nil-rate band trust set up by his wife, to hold her share of the family home, was originally his.
As a result there has been much speculation within the industry on how this affects nil-rate band trusts and the circular transfer of money, with some suggesting people have to die in the right order to avoid IHT.
The Royal Bank of Canada, says the outcome of the 'Phizackerley' case may have implications for thousands of couples who have written their wills in such a way as to take advantage of the 'nil rate' IHT band available to each UK taxpayer even if they do not have sufficient liquid investments to leave assets directly to their children.
As a result RBC says for some time, advisers have encouraged clients to arrange to use their nil rate band by leaving their interest in the family home in trust so their surviving spouse can live in it without suffering any additional tax on death.
But while it says this is “perfectly legal, and completely consistent with the spirit of the legislation, HMRC has always objected to the planning, and sought ways to attack it”, but without success until the Phizackerley case.
And it warns HMRC’s victory in this "first battle of what is likely to be a long war" on IHT planning for family homes - which it says is unlikely to be appealed – means HMRC may move some way towards achieving it's goal, albeit in fairly specific circumstances.
Louise Somerset, from Royal Bank of Canada, says it is surprising the Revenue is focusing their energies on recovering relatively small amounts of tax from families whose home is their main asset, rather than challenging the “super rich, whose wealth can still be protected from tax relatively easily”.
And she adds: “It is also unfortunate the Revenue has adopted an argument which relies on the assumption that, because she had not worked, Mrs Phizackerley had not contributed to her family’s ability to buy their home. The tax authorities seem to believe that bringing up a family and running a home do not have any real value.”
However, Somerset says although the particular form of planning used by the Phizackerleys may not be effective, she believes taxpayers can still achieve the same overall tax savings.
She warns: “It is always a good idea to review your will regularly and there are a number of other straightforward ways to make sure you take full advantage of the [tax] relief Parliament intends you to have – which is all the Phizackerleys were trying to do."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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