Skandia is warning advisers the result of the Phizackerley test-case on inheritance tax and will trusts has "far-reaching implications" for all trusts making loans to beneficiaries.
In February the Special Commissioners ruled in favour of HM Revenue & Customs (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.
However, while the Phizackerley case focused on the family home, Skandia says the same principles on the circular transfer of money can be applied to any trust arrangement where a beneficiary receives a loan from the trust rather than an outright payment.
The firm points out these loans are a common financial planning strategy because it means should the beneficiary die, the money which they received from the trust and subsequently spent will reduce their taxable estate for IHT purposes, as the loan has to be repaid to the trust.
For example, if a wife sets up a trust of £100,000 for her spouse and children, when she dies the trustees could lend her husband £60,000 from the trust which he can spend. Then when he dies the £60,000 would be repaid to the trust, reducing his estate for IHT purposes.
However, Skandia points out if - like the Phizackerley’s - the husband had made substantial gifts to his wife since Budget Day 1986, then the husband’s estate would not be reduced by the full amount of the loan.
Instead the total value of the gifts will be deducted from the loan, and the difference will be deducted from the husband’s estate, which means the IHT bill would not be as low as expected.
As a result, Skandia warns when setting up any trust arrangements - including Discounted Gift Trusts, loan trusts and will trusts - advisers need to remember to ask whether the settlor’s spouse, or any other beneficiary, has made any substantial gifts to the settlor at any point since Budget Day 1986.
Colin Jelley, head of tax and financial planning at Skandia, says considering residential property accounts for over 40% of all assets on which IHT is paid, the Phizackerley case is the latest in a long list of signals that shows the Government is wary of IHT planning schemes which involve the family home.
He adds: “This is likely to increase the focus on IHT planning strategies which involve investment portfolios rather than bricks and mortar. However, this case also has wider implications for other trust arrangements making loans to beneficiaries. Advisers must remember that any prior substantial gifts from the beneficiary to the settlor may limit the effectiveness of this planning strategy.”
To make any comments on this story contact:
Tel: 0207 034 2681
Email: [email protected]
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till