Assets going round in circles

Julie Hutchison, Estate Planning Specialist at Standard Life Assurance Limited, comments on the recent decision of the Special Commissioners for Tax in the Phizackerley case.

"I regularly attend professional conferences on IHT and trust planning".

"For several years now a risk point about nil-rate band Will Trusts has been raised at some of these events, normally ending with the comment "but HMRC has not yet taken the point in a case as yet." News of the Phizackerley case therefore does not come as a surprise - many people will consider that it was just a matter of time before a case arose with an unfortunate order of events and order of deaths for Section 103 Finance Act 1986 to apply".

"What it comes down to is this simplified example: A and B are spouses".

"A is the wealthier spouse and A gives some assets to B to help to equalise their estates for tax purposes".

"B later dies and B's will contains a nil-rate band Will Trust".

"That trust includes the surviving spouse A as a potential beneficiary along with the children, which is entirely normal".

"The trustees have full discretion over who benefits and when, and decide to make funds available to A.

The trustees don't simply distribute some assets to A: instead they lend them to A, perhaps on an interest-free basis repayable on A's death".

"Section 103 Finance Act 1986 is relevant here since that loan might not be deductible on A's death, since the funds have essentially gone round in a circle, emanating from A in the first place and ending up back in A's hands by virtue of the loan".

"Any suggestion that the Phizackerley case is evidence that nil-rate band Will Trusts do not work is wide of the mark".

"The trusts themselves are not the issue".

"The issue is rather this: in what way are funds made available to the surviving spouse from the trust? If the funds are made available by way of loan, simply take care to check first whether the "circle of transfer" point applies before deciding whether to make a loan or an outright distribution".

"Much depends on which spouse dies first".

"Had Dr rather than Mrs Phizackerley died first, this issue would not have arisen".

"This point is relevant in any trust where the trustees are considering making a loan to a beneficiary rather than an outright distribution".

"In particular it affects nil-rate band Will Trusts where assets are lent to the surviving spouse (sometimes called an "IOU" situation) rather than distributed outright, which is a route particularly favoured when dealing with the family home." Those involved in advising families on IHT and estate planning can take away two points from this recent case: 1.

pause and reflect before proceeding to equalise the estates of spouses; 2.

pause and reflect before advising trustees to make a loan to a beneficiary, to check if the "circular" point set out above applies Tax and legislation are liable to change.

This information is based on Standard Life's current understanding of law and HM Revenue and Customs practice in the UK.

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