There have been some interesting legal decisions recently which have affected the rights of couples, be they married or cohabitees, and could potentially lead to changes in the way finances are managed and advised on.
First off there was the decision in the Phizackerley test case on nil-rate band will trusts – which judging by the number of reads on the site has caught the imagination of the IFA sector.
Since the Special Commissioners decided in favour of HM Revenue & Customs, many experts have been queuing up to predict what this means for the future of nil-rate bands and the process of 'debt and charge' schemes.
It is pretty clear in this case the reason the Phizackerley’s were caught out was firstly because Mrs Phizackerley died first and secondly because Mrs Phizackerley did not work during her marriage she was not considered to be entitled to an equal share of the home, and despite being joint tenants in common, the Commissioners ruled Dr Phizackerley had bought the property so a circular transfer of funds meant the assets in the trust were technically his and could be included in his estate for IHT purposes.
Does this sound complicated? Well it’s not really.
This ‘test case’ only seems to affect people in the same situation as the Phizackerley’s where there is seen to be a circular transfer of funds, and the Society of Trust and Estate Practitioners (STEP) warns while the ‘debt or charge’ scheme is not dead, it means advisers need to ask more searching questions.
However, in my opinion, I think the biggest issue with this – and possible grounds for appeal – is the fact the Special Commissioners and HMRC decided because Mrs Phizackerley did not work during her marriage she was not entitled to a share in the house.
Lawyers for the Phizackerley’s beneficiary tried to argue the share of the house was based on maintenance grounds, but the Special Commissioners dismissed this by saying Dr Phizackerley could have provided his wife with a home without making her a joint tenant.
Fair enough you might say, but in divorce cases more women are starting to receive credit – monetarily – for the contribution they play in bringing up a family and supporting their spouse in their career. So if raising a family counts for something in a divorce settlement, why does it count for less on the issue of IHT?
Secondly the House of Lords last week ruled a cohabiting couple are considered to own a property in equal shares, unless one of them can prove why they are entitled to a larger share.
This ruling may not seem to have that big an impact, but as more people live together without getting married and share financial decisions such as buying property, advisers need to be aware of any legal precedents in the case of a split, or even death.
The Law Commission is currently considering changing the law to allow cohabitees to receive the same rights as married couples, so it is possible in the future the Phizackerley case will not act as a warning to married couples, but also to cohabitees.
However, following the decision to treat a couple as jointly owning a property unless proved otherwise, the question is how can HMRC justify not considering Mrs Phizackerley to have a joint share of the home?
It seems the Revenue and HM Treasury are becoming even more inventive in their efforts to reap in tax charges, but I think this will be an interesting case to follow, as while HMRC may have won the first battle over family home IHT planning, I don’t think they will have won the war.
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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