A recent court ruling could have implications for thousands of couples who have written their wills to take advantage of the nil rate inheritance tax (IHT) band, Royal Bank of Canada has claimed.
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%. They decided that because Mrs Phizackerley had not worked, she had not contributed to her family’s ability to buy the house.
Louise Somerset, spokeswoman for the Royal Bank of Canada, said it was surprising HM Revenue & Customs was focusing its attention on recovering relatively small amounts of tax from families whose home was their main asset, rather than challenging the super rich, whose wealth could still be protected from tax relatively easily. She added: “It is also unfortunate that the Revenue has adopted an argument that 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.”
Julie Hutchison, estate planning specialist at Standard Life Assurance, said the case would be relevant in any trust where the trustees are considering making a loan to a beneficiary rather than an outright distribution. She said: “In particular it affects nil-rate band will trusts where assets are lent to the surviving spouse (sometimes called an “IOU” situation) rather than distributed outright, which is a route particularly favoured when dealing with the family home.
“Those involved in advising families on IHT and estate planning can take away two points from this recent case. Firstly, pause and reflect before proceeding to equalize the estates of the spouses. Secondly, pause and reflect before advising trustees to make a loan to a beneficiary.”
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