Phizackerley v Revenue & Customs (2007)

Mr and Mrs Phizackerley made nil-rate band discretionary Wills. Mrs Phizackerley died first and the Trust consisted of her half share of the property, valued at £150,000. This was transferred to Mr Phizackerley on him promising to pay £150,000 to the Trustees of the nil-rate band discretionary trust.

Mr Phizackerley subsequently died. The Trustees of the discretionary trust called in the loan which would have had the effect of reducing the value of Mr Phizackerley’s Estate and minimising Inheritance Tax.

The Revenue challenged the scheme and succeeded on a technicality. In particular, their argument centred on the form of loan set up and the fact that Mrs Phizackerley, (who had not made any financial contribution to the marriage), died first.

OUR COMMENTS ON THE CASE

The major reason the family lost was because Mrs Phizackerley did not go out to work and did not contribute financially towards the property. This is by far the most outrageous part of the decision and flies in the face of family law where indirect contributions, such as the care and control of the children, are taken into account in any divorce settlement. For this reason, we expect this case will be challenged in the future although, sadly, the Phizackerley family do not wish to appeal.

In the meantime, families need to be more careful in how the discretionary trust is set up on the first death.

There are two ways in which a Loan Agreement can be established, namely:-

1. The Trust assets are given back to the surviving spouse in return for an IOU to the Trust.

2. The Trust assets are given to the spouse subject to a charge secured on the property.

We would always recommend the charge route in respect of property and, up until now, have recommended an IOU in respect of any residual assets being placed in the Trust.

The charge route has not been impacted upon by the decision. However, if the Trust has been set up on the basis of an IOU, the case could, potentially, impact on the scheme.

We must then look at the individual who has died. If it is the spouse who has contributed financially to the marriage (often the husband), the case will not have affected the scheme, whereas if the non-contributing party has died, it will have done so.



STEPS TO BE TAKEN AS A RESULT OF THE CASE

WHILST BOTH SPOUSES ARE ALIVE

1. Provided your Wills allow for the establishment of an equitable charge, there is no need for any amendment. As a matter of course, however, we would recommend that you make a statement confirming that both parties to the marriage have contributed towards the property and other assets. If one spouse is not working, consider whether you have placed inheritances into either the purchase of the property or repayment of part of the Mortgage or made other financial contributions. Ideally this statement should be placed with your Wills.

WHEN ONE SPOUSE HAS ALREADY DIED

2. As indicated above, no part of the Trust Fund loaned by way of an equitable charge has been impacted upon by the case. This would normally relate to the property. If the residual cash has been lent to the survivor by way of an IOU, we would suggest that the scheme be reviewed and you consider calling in the loan with the cash assets to be invested within the Trust.


For further help and advice please email Jeremy Groeger-Wilson or call him on 01689 887847.