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STEP Comments On Implications Of Phizackerly Case For Estate Planning

by Jason Gorringe,, London

20 April 2007

A recent decision by the UK's Special Commissioners for Tax regarding an arrangement put in place by academic Dr Patrick Phizackerley and his wife Mary to reduce their potential inheritance tax burden has caused concerns amongst those in similar situations, as well as amongst professionals who advise on such matters.

In a statement on the subject published this week, the Society of Trust and Estate Practitioners (STEP) explained that under the type of debt or charge scheme (also sometimes known as a tenants-in-common trust) employed in the case in question, husband and wife (or Civil Partners) will want to preserve from IHT as much of their estates as they can and realise that an outright gift of the estate to each other, with residue passing to the children on the second death, is inefficient.

STEP argued that:

"The nil-rate band of the first spouse to die has effectively been thrown away because it overlaps with the exemption that is available on the transfer to a (UK-domiciled) spouse. Put in the simplest possible terms, the debt or charge scheme is a means whereby the nil-rate band of the first spouse to die is “put in the freezer” and is available to be drawn the second death. Unfortunately that simple description quite fails to recognise all the legal niceties that are involved and Phizackerley illustrates one of the pitfalls."

Tony Harris, of the STEP Technical Committee confirmed that:

“The debt or charge scheme is complicated, both in its establishment and its management. Phizackerley tell us that the enquiries that professionals have to make should be more searching than some previously thought. Couples are advised to seek the advice of an experienced and qualified professional rather than rely on generalists.”

"Phizackerley v CIR reminds us that the fact that gifts between spouses are themselves exempt does not take those gifts outside the scope of section 103 of the Finance Act 1986. In practical terms, this will increase costs because of the extra enquiries to be made and, where it is appropriate for the residue of the estate to be left to the surviving spouse on an interest in possession trust rather than absolutely, extra time will be needed to explain how s103 works and how to avoid the trap that has caught the family of Mrs Phizackerley."

"The English love houses and tend to tie up much of the family wealth in the family home with the result that few spouses are able, at death, to leave liquid assets equal to the nil-rate band to their children without unduly stretching the financial resources of the surviving spouse. The money is in the home."

"The debt or charge scheme commonly operates by terms of the will under which the first spouse to die leaves the amount available to him or her of the nil-rate band at death to trustees for, usually, the immediate family, with residue to the surviving spouse. In the absence of sufficient liquidity, the gift of the nil-rate sum is satisfied in one of several ways, the commonest of which is effectively a promise of payment by the surviving spouse or a charge over the half share of the house owned by the first spouse to die."

He concluded:

"The result is that the trustees of the nil-rate band have under their control only such liquidity as there may have been in the estate of the first spouse to die plus a loan document in respect of the balance of the nil-rate band. It is hoped that the value of the debt will in due course reduce the estate of the surviving spouse."

The ruling by the Special Commissioners for Tax has reportedly left the family facing an IHT bill in the region of GBP60,000.

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