Revenue Challenge to Inheritance Tax Planning

Revenue Challenge to Inheritance Tax Planning

Many of you will have seen recent press reports of HMRC Special Commissioners’ decision in the Phizackerley case. The Revenue successfully argued that a Loan Note arrangement set up on the death of the first spouse under the “Nil Rate Band Discretionary Trust” arrangements, was not deductible from the estate of the surviving spouse for Inheritance Tax purposes because the surviving spouse had, prior to the death of the first spouse made a gift of all or part of the value of the main matrimonial property to the first spouse to die and the debt was therefore not deductible under the “anti-avoidance” rules set out in Section 103 of the Finance Act 1986.

Whilst this may be good law on a strict interpretation of those provisions, the decision appears to run at odds with matrimonial law in the sense that in this case the Revenue looked only at financial contribution rather than other contributions to the marriage. Nevertheless, there must therefore be some doubt as to whether or not, in all cases, the Revenue may seek to argue there has been some element of gift in relation to the matrimonial property, or indeed other assets, and that the Loan Note is therefore not deductible. This arises because in the Phizackerley case, the Loan Note had been given by the surviving spouse who, it was held, had made the gift in favour of his spouse in her lifetime. If, therefore, the Loan Note is deductible but not given by the surviving spouse, it should still serve to reduce the value of the survivor’s estate for Inheritance Tax purposes. We are therefore recommending that in all cases where a Nil Rate Band Discretionary Trust is relevant, the residuary estate is given to Trustees to hold upon trust for the surviving spouse for a Life Interest with the property passing on the second death to the chosen beneficiaries so that the Trustees of the residuary estate who give the Loan Note to the Trustees of the Nil Rate Band Discretionary Trust.

We would therefore recommend that anyone who has a Nil Rate Band Discretionary Trust arrangement should review their Wills and if there is any doubt, contact us to see if any changes are necessary.

Unfortunately, the family in the Phizackerley case are not expected to appeal the decision and so it is essential that professional advice is taken in relation to these complicated and important matters and we would be delighted to assist in any particular case. For further information, please do not hesitate to contact Nicholas Turner, the head of our Private Client Department.