Phizackerley v HMRC

Another area of tax planning (estate planning) looks like it is being squeezed.

I will post below details from Simon Shaffer of Moerans, a lawyer friend of mine that specialises in Estate Planning and Inheritance Tax planning with me. It’s clear that it is early days and in reality I would guess that this case although important surely must have some exceptional circumstances for the revenue to take this stance on this particular case.

I’ll post follow ups as and when they occur.

Dear John,

You may have recently seen press reports about the decision in Phizackerley v HMRC. I thought that it may be useful for me to give you some further information on the case and its implications for IHT planning via Nil Rate Band Trust schemes.

The case revolves around the application of section 103 of the Finance Act. This basically says that you cannot make a gift to your spouse during your lifetime and then use the value of that gift to create a debt. Thus if Mr A owns a house and gifts 50% of it to his wife, and she dies first, the value of the gift cannot be deducted from his estate (on his subsequent death) if he borrows the value of the gift back. This only arises in the context of the nil rate band “DEBT” scheme. Up to this time this is an area that the Revenue have not actively pursued, however this may well be changing now, in which case some estates might be caught; but only if the sole breadwinner survives i.e. if MRS or MR dies first and only if the Revenue challenge the deduction on the second death.

In Phiz the family home was purchased jointly but the wife had not worked. The Special Commissioners determined that in effect MR had paid all the money for the property and therefore when they severed the tenancy it was a gift of 50% of the property from him to her, even though she was already a joint owner according to the Land Register. S103 then kicked in when he died having borrowed back the value of the gift thus the debt was non-deductible from his estate for IHT purposes. Unfortunately they did not have any other assets to use in the scheme except the family home.

The profession has a number of questions and also a serious doubt about the validity of the decision and it is hoped that the case will be appealed to the High Court.

Amongst the questions are: When is a wife a non-working spouse? Why is her contribution of running the family home and bring up children not considered to be “working” towards the increase in family assets in this area of law as it is in divorce law?

There are ways of avoiding Section 103 but as always each case needs to be looked at on its own merits and the clients advised accordingly. As with all press reporting the implications of a particular decision can be blown out of proportion. Certainly the case has drawn a line in the sand but I suspect that the line will be moved back in the taxpayers’ favour in the future as the repercussions of the decision are discovered.

Currently nothing needs to be done. When these schemes come to be implemented, i.e. on the first death, we will determine whether to proceed via a charge (rather than debt) or whether we need to vary the Will to provide the survivor with a life interest rather than an absolute interest in the residue which are ways of proceeding which are not caught by section 103. However if, as is more common, the main breadwinner (MR) dies first there is no problem at all.

Nil rate band planning in Wills still offers a highly flexible and tax efficient option for those clients with a joint estate of more that £400,000 and we will certainly still be recommending this type of planning. We will however now take much more note of life time gifts made between spouses and their relative health.

If you need any further information do not hesitate to contact either Geoff or I.

Simon J. Shaffer
MOERANS solicitors
123 Station Road, Edgware, Middlesex, HA8 7JR

There was also an article in the Sunday Times which covers what Simon mentions above.

http://business.timesonline.co.uk/tol/business/money/tax/article1660233.ece

Johnny