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Phizackerley -v- HMRC
Published May 2007
There have been many reports in the media concerning the recent case, Phizackerley –v- HMRC. Whilst the taxpayers ultimately lost the case, and ended up paying inheritance tax that they did not expect, the case turned very much on its particular facts and, contrary to some of the sweeping statements in press articles, is not the death knell of tax planning through will trusts Therefore, the outcome of the case does not need to be a matter of concern for our clients.
The facts of the case are that husband and wife bought their home jointly. However, other than the mortgage (which only made up 20% of the purchase price) the husband provided all funds for the purchase. The joint tenancy was later severed and they created through their wills discretionary trusts. Following the wife’s death the executors placed a one half share of the house into her trust, after which it was transferred to the husband in return for him loaning to the trust an equivalent sum in cash.
As I am sure you have read previously this is an entirely normal piece of estate planning, and has worked effectively for many years and that we have undertaken for our clients. The problem arose when the husband later died. His executors claimed he owed the sum loaned to the trustees of his late wife’s trust, and it was therefore a debt in his estate. Unfortunately, HM Revenue & Customs argued that the loan could not be treated as a debt to the trust as it was in effect the asset it derived from i.e. the half share in the house, which was provided by the husband. The Revenue won the case.
The underlying implications are clearly of considerable concern. It is now necessary to look very closely at how you and your spouse (or civil partner) have acquired the assets you currently own, and not only that, but who actually provided the funds for them. Where the home is concerned it may even be necessary to go back through a series of different properties to trace the original source of the funds.
Interestingly if the half share in the house had been left in the discretionary trust the Revenue would not have been able to run this argument. Other steps could have been taken too which would have avoided a successful challenge by HMRC. Therefore, if you presently have these types of provisions in your Will do not be concerned. In our opinion you will not need to redraft your existing Will, there are ways and means of negating these effects and mfg Solicitors are well versed in the options available to you.
However, for those cases where one spouse has already died and the same arrangements have been put in place as in this case, then the position should be re-examined as a matter of urgency.
If you would like to find out more about the services that we provide, please e-mail or contact us to arrange a meeting.
