A test case decision by HM Revenue & Customs' Special Commissioners could mean the use of nil rate band discretionary trusts to avoid Inheritance Tax is under threat, claims MacIntyre Hudson.
The accountancy firms says the decision by Special Commissioner Dr John Avery Jones to reject an appeal against a notice determination by HMRC could mean a “previously “safe” tax planning mechanism for reducing the IHT charged on the family home could be chalked off”.
MacIntyre Hudson claims to reduce the IHT liability of a married couple it has been common practice to place the value of the family home into a discretionary trust for the heirs on the first death of the couple - up to the nil-rate band of £300,000 and in the form of an IOU.
It says this planning method can save families around £120,000, as it allows the deceased spouse to pass on money to the heirs through the trust, rather than first leaving the sum to their husband or wife which simply increases their IHT liability.
However in the test case of Phizackerley v HMRC, which was heard in February, Avery Jones ruled the money owed by Phizackerley to the trust set up under his wife’s will did not qualify as a reduction in the value of his estate on his death.
In this case the Commissioner decided Dr Phizackerley had fallen into the trap of section 103 of the Finance Act 1986, because he had apparently funded the property entirely, as his wife who died first had not worked during the marriage.
As a result Avery Jones rejected the appeal by Phizackerley’s daughter, and under the anti-tax avoidance rules Phizackerley’s IOU to the trust, of £153,222.99, was ignored leading to a significant increase in the IHT payable.
Nigel May, tax principal at MacIntyre Hudson, says this decision “seriously muddies the waters” over what was considered to be a core technique for reducing a married couple’s IHT liability.
But he adds: “It does emphasise the importance of approaching IHT planning with extreme care. The fact is if Dr Phizackerley had died before his wife, the entitlement to deduct the value of an IOU owed by the wife to a trust set up by her husband would have been indisputable and the IHT would have slipped through the Revenue’s fingers.”
“It’s a ludicrous situation: you are all right as long as you die in the right order. The secret of mortality is timing.”
Have Your Say: Peter McGahan of Worldwide Financial Planning says:
"The test case Phizackerley v HMRC doesn’t put nil rate band planning under scrutiny at all. In this case the husband gave the money to the wife, then on her death she left a value in her estate which he in turn borrowed as a loan."
"It was defeated on the basis of the circular arrangement. Had he not borrowed it would be fine. This case would have no impact at all on normal nil rate band planning."
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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