Life offices are warning IFAs to exercise caution when drawing up trusts in light of the Phizackerle...
Life offices are warning IFAs to exercise caution when drawing up trusts in light of the Phizackerley case relating to inheritance tax (IHT) liabilities.
The Phizackerley case involved a married couple who held shares in their home as tenants-in-common. When Mrs Phizackerley died, her £150,000 half share in the home passed into a discretionary trust, taking advantage of the nil rate IHT allowance.
The case centred on the family's belief that it would not have to pay tax on the wife's half of the property. But the Special Commissioners ruled the children would have to pay tax at 40%, relating to the fact that Mrs Phizackerley had not worked, and therefore had not contributed to her family's ability to buy the house.
Skandia warned the case had "far-reaching implications" for all trusts making loans to beneficiaries. Colin Jelley, head of tax and financial planning at Skandia, said: "Advisers need to remember to ask whether the settlor's spouse, or any other beneficiary of the trust, has made substantial prior gifts to the settlor at any time since Budget Day 1986 and ensure this is factored into their recommendations."
Deborah Moon, senior trusts and tax planning manager at Norwich Union International, said the Phizackerley case did not spell the end for IHT planning through will trusts. She added: "The decision simply confirms the working of the s103 FA 1986 Act and signals that advisers need to be very careful in their decisions and also be prepared to review the trust or will if the situation changes."
Julie Hutchison, estate planning specialist at Standard Life Assurance, added: "The trusts themselves are not the issue. The issue is what way the funds are made available to the surviving spouse from the trust. If the funds are made available by way of loan, simply take care to check first whether the "circle of transfer" point applies before deciding whether to make a loan or an outright distribution."
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