Many of you will have read about the recent case of Phizackerley v CIR - a worrying case for couples with nil band discretionary trusts (including the debt or charge scheme) in their Wills.
The debt or charge scheme works by the terms of the Will of the first to die which commonly leaves an amount equal to the nil rate band (currently £300,000) to trustees (for the benefit of the family) with residue to the surviving spouse. In the absence of sufficient liquidity (because most of us have all our money tied up in our home) the gift to the trustees of the nil rate band is satisfied by a promise of payment by the surviving spouse or a charge over the house. The trustees therefore own a loan document and it is hoped that the value of the debt will reduce the estate of the surviving spouse when they die, thus saving Inheritance Tax (IHT).
However, anti-avoidance legislation prevents the deduction of such a debt where and to the extent that consideration for the debt consists of ‘property derived from the deceased’. The Phizackerley case has taken this further by saying that Mrs Phizackerley never worked or contributed to the mortgage and therefore when she and her husband bought the house jointly, he must have provided “her half” because she did not financially contribute. Thus Mrs Phizackerley’s half was derived from her husband and the debt he had given to the trustees was non-deductible and the scheme had failed.
This does not mean that all nil band trust Wills with a debt/charge scheme will fail. Whilst not commenting on the chauvinistic aspect of the case, many wives do work at various times and therefore the purchase of a house in joint names should not necessarily lead to the conclusion that the funds must have been provided by the deceased. For these clients the Wills should work. There is clearly uncertainty about other forms of financial contribution – please do take advice if you feel this may apply to you.
However, it is clear that those in the Phizackerley situation or those husbands and wives who have made substantial gifts between them, need to take legal advice and review their Wills as there are ways we can help you around the problem.
Do also remember the deadline is October to make your Enduring Power of Attorney (EPA). An EPA enables you to appoint someone to make decisions about your property and affairs and is invaluable should you lose capacity or be too poorly to manage. However, from October it will no longer be possible to make an EPA, although existing EPA's will remain valid after October. From October, you must make a Lasting Power of Attorney which will be wider reaching (dealing with financial and welfare matters), more complex and more highly regulated.
Justine Hardy is a partner at Raworths and head of the Probate, Wills and Trusts Unit.
To contact Raworths, telephone 01423 566666 or visit our offices at Eton House, 89 Station Parade, Harrogate HG1 1HF. Or visit our website on www.raworths.co.uk or email justine.hardy@raworths.co.uk
