Tax Planning Wills following the Phizackerley Case

There has been a lot of press coverage regarding the recent case of the late Dr Phizackerley with questions arising as to whether tax planning Wills which incorporate the use of the Nil Rate Band Discretionary Trust are still effective. It is our view that the tax planning Wills we specialise in at Parrott & Coales LLP are still effective following Phizackerley and should still be used as an extremely effective form of planning for inheritance tax.

The tax planning Wills we specialise in are currently available for married couples and couples who have entered into civil partnerships. They are designed to make use of both parties’ Nil Rate Bands (which is the element of an estate which is taxed at 0% for inheritance tax purposes or is, in effect, “free of” inheritance tax. The Nil Rate Band is currently £300,000.) The aim with tax planning Wills is to use both of the parties’ Nil Rate Bands to offset against any inheritance tax, having (under current figures) £600,000 free of tax as opposed to £300,000 free of tax which would be the case if no tax planning was carried out.

Our tax planning Wills incorporate the Nil Rate Band Discretionary Trust and Debt Charge Scheme. (A separate handout is available on our website regarding how this scheme operates, or we would be happy to send a copy to you if you would prefer.)

In summary, this scheme allows the use of the first to die’s share of the family home (or perhaps other property) with the tax planning Will without putting the survivor’s occupation or ownership of the house at risk. The surviving spouse would still have control over the property. This scheme offers security, peace of mind and flexibility as well as tax planning. (Again, a detailed description of this scheme can be seen in the handout referred to above.)

Where the family home had originally belonged to one party and it was then decided to transfer the property into both parties’ name to use it with the tax planning Wills, there has always been the risk that, if the recipient of half the house died first and “their share” of the house was used in the tax planning scheme, HMRC (formerly Inland Revenue) could argue that that person’s “share” of the house would not be allowed to be used for inheritance tax purposes. Therefore when the second person died the full value of the house would be added to their estate for inheritance tax purposes. Where this situation has arisen, we have advised clients accordingly and can take steps to counter this argument.

The Phizackerley case should be viewed on its particular facts. Dr Phizackerley was a Don at Oxford University and he and his wife and family lived in university accommodation. When Dr Phizackerley retired he and his wife bought a property jointly as joint tenants. A few years later the ownership of the property was changed to tenants in common, which would mean that, rather than the house passing automatically to the survivor on death, it would pass by the terms of the Will. (This is the way in which a property needs to be held in order to make use of the property in tax planning Wills.)

Mrs Phizackerley died first and a tax planning scheme was set up incorporating the Nil Rate Band Discretionary Trust. (If Dr Phizackerley had died first there would not have been an issue.) However, the Debt Charge Scheme was not used. Instead of using the Debt Charge Scheme Dr Phizackerley became personally responsible for repaying funds to his late wife’s trustees in relation to her “share” of the house.

When Dr Phizackerley died, his executors submitted to HMRC that the funds he had personally agreed to repay to his late wife’s trustees (in relation to her “share” of the house) should not be included as part of his estate for inheritance tax purposes. However, this was rejected by HMRC and the full value of the house was treated as belonging to Dr Phizackerley. Therefore, the tax planning in relation to the house did not succeed.

It was held that as Mrs Phizackerley had not worked or had a career during their married life, the funds used to purchase the family home had come from Dr Phizackerley’s earnings. Therefore, HMRC argued that a similar situation as outlined above (where one party had owned the house and then transferred it into their joint names) applied in this case and Mrs Phizackerley’s share of the house could not be used for inheritance tax planning.

A significant feature in this case is that HMRC successfully argued that if one party can be held as not having contributed financially to the property (even if they had run the family home and family and enabled the other party to carry out their career) that they do not have an actual interest in the property.

If tax planning Wills are prepared incorporating the Nil Rate Band Discretionary Trust and the Debt Charge Scheme (as we do at Parrott & Coales LLP) the use of the Debt Charge Scheme should avoid these issues arising. If there is a situation where one party had either not worked in a career or job during the relationship (and therefore there is a risk that it could be held that they have not contributed financially towards the property) or, as mentioned above, if the property had initially belonged to one party, then we would advise clients of what steps can be taken to protect the inheritance tax position in relation to the use of the family home.

If you would like to discuss matters further, please do not hesitate to contact Iain Wanstall at Parrott & Coales LLP. Telephone number: 01296 318500. Website address: www.parrottandcoalesllp.co.uk