The involved Dr Patrick Phizackerley who purchased a property in joint names with his wife, following his retirement from Balliol College, Oxford. Mrs Phizackerley died first and on her death gave her half share of the family home to a discretionary trust. The trustees transferred Mrs Phizackerley's share of the property to her husband in return for an "I.O.U." or promissory note given by Dr Phizackerley.
The matter came up for review before the Revenue on the death of Dr Phizackerley. The executor sought to deduct the amount of the charge from the value of the house in Dr Phizackerley's estate but the claim was denied by the Revenue on the basis of Section 103 of the Finance Act 1986.
The Revenue rejected the deduction on the basis that Mrs Phizackerley had never worked during the marriage and could not therefore have contributed to the purchase of the jointly-owned property; they argued that Dr Phizackerley had bought the entire property and then given an I.O.U. to the Trustees relating to a half share of the property which he originally paid for. The Revenue said that entering into a loan arrangement in relation to property which the husband originally owned fell foul of Section 103.
Many clients have contacted us with concerns since this case was reported, and our advice is as follows:-
1. This case was decided on its particular facts, which in many cases will not apply.
2. Where both husband and wife (or both civil partners) have worked or both have brought assets to the partnership (such as from an inheritance) there should be no problem with Section 103.
3. The way that the discretionary trust is set up and operated on the first death is of the utmost importance. In this case the trust was set up by the use of a loan given by the surviving spouse to the trustees; in recent years we have advised that the executors, rather than the surviving partner, should charge the share of the property which belonged to the partner who has died, with a debt in favour of the trustees, before distributing the property to the survivor. This arrangement may sound little different from that used in the Phizackerley case but because it is the executors who create the charge, not the spouse, it should not fall foul of Section 103.
4. In the Phizackerley case, if Dr Phizackerley had died first, and his wife had survived, there would have been no problem; it is only where the partner who provided all the assets survives that a problem with Section 103 arises.
5. Care must be taken if the surviving partner sells the family home and sets up a new loan arrangement in relation to the replacement property.
6. In some cases, it may be advisable for the surviving spouse or partner not to be appointed an executor of the Will; also, in some cases we may advise that the surviving partner should be given a life interest only in his/her partner's estate rather than an absolute interest.
7. If there are sufficient assets, the trust can be set up using other assets, without recourse to the family home or any loan scheme and in that case Section 103 would not be an issue.
8. There is still scope for couples to undertake tax planning in Wills - using the nil-rate band (currently £300,000) left either directly to the next generation or to a discretionary trust under which the survivor can benefit. This type of planning is too valuable to be ignored since based on current tax rates, up to £120,000 can be saved. However, this is a technical area and specialist advice, which Morrisons can provide, should always be taken.
Contact one of the private client team at Morrisons and make an appointment to discuss your situation if you would like advice on inheritance tax planning.
