The Phizackerley family have suffered from a landmark ruling from the Special Commissioners, an appeal tribunal in tax disputes with HM Revenue and Customs, who ruled that non-working spouses may not take advantage of a discretionary will trust agreement if they have not contributed financially to the building up of a couple’s assets and if the non-breadwinner in the family dies first.
This nil-rate band discretionary will trust arrangement, used by many couples to limit inheritance tax liability after their deaths, has been called into question in these circumstances. The nil-rate discretionary trust method usually involves splitting the value of the home between husband and wife, so they may both fully use their respective IHT allowances of £300,000.
While the family have decided not to appeal, if another case is tested with the European Human Rights Act in mind, the result may be overturned.
How it works
To start a discretionary will trust, a married couple or civil partners (not accessible to unmarried partners) must be the owner of their property as tenants in common, not joint tenants. When a partner dies, the house will pass to the surviving spouse with no inheritance tax payable, as transfers between spouses are tax free. The Wills are drafted so that assets up to the allowance of £300,000 can be transferred into trust at the time of the first death for the benefit of the couple’s heirs. So they don’t have to sell the home, a clause in the will allows payment to the trust by means of an IOU against the surviving spouse. When they die, the trust has the loan repaid from his/her estate.
What happened
It was ruled that their discretionary will trust arrangement was not valid, because the late Mrs Phizackerly had not worked or contributed financially to the building up of the couple’s assets.
What to do
In many circumstances these plans are still the best advice, but first check with a consultant from LSUK who will be able to appraise your situation and advice accordingly. If there is any doubt we suggest that you document carefully the source of money used to buy property or build family assets.
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