what izackerley was Phizackerley

what izackerley was Phizackerley

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What was the position in this special commissioners case. Does it affect wills written where a joint tenancy have been severed, with a half share passing to children on first death (subject to the surviving spouse having a right to remain).

OK that's two or three questions:

1. Does this case only apply where there is a discretionary trust
2. Does it affect a severed joint tenancy where the will leaves a half share of the home to children on first death.
3. Does a 'right to remain' in favour of the surviving spouse have an impact

Andrew Prentice

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By Paul Soper
16th Apr 2007 15:32

A bit early? - Part 1
It might be a bit early to comment on the case as we seem only to have recently seen the Special Commissioner's report but it seems that the trap that caught the scheme was rather more specific and peculiar to the facts of the case than the general press commentary which seems to think that Discretionary Will Trusts as a planning device are ruled out.

The problem , as I see it, is that solicitors like to see people having a right to live in a property, and so seem keen to over egg the pudding and build in rights that may don't need to be there. In an earlier case, the Lloyds Private Banking case the scheme didn't work because the wording of the will tried to give the surviving spouse the right to live in the whole property, given that they only own half, by deferring the obligation of the trustees of the trust for sale until the survivor died, when the interest was to pass absolutely to a daughter BUT in the meantime someone must have had an interest in the half of the property that was the subject of the bequest and that could only have been the surviving spouse. So we move on to the sort of scheme used here where the ownership of the house is divided by terminating the joint tenancy but then on the death of the first spouse the whole of the property is transferred to the survivor in exchange for a debt owing to the first estate, then registered as a charge against the property - pretty standard tax planning of the sort that every solicitor will recommend but...

The scheme fell foul of a statutory trap (to use the Commissioner's words) designed to catch a rather different scenario. The trap in question is part of FA1986 which transformed CTT into IHT and created the concept of the PET and Gifts with reservation of benefit. In fact if you look at the way the act is constructed you can see what the legislator was driving at...

s100 renamed CTT as IHT, s101 created the PET and inserted Sched 19 into the now renamed IHTA1984. s102 then tried to stop people making a PET during lifetime but continuing to use the asset as a Gift With Reservation of Benefit (GWROB). s103 is what the case is aimed at and this was to prevent a method of avoiding the GWROB rules. Suppose A gives an asset to B but wants to continue using it - a classic GWROB. So if no s103 existed you could buy the asset back from B in exchange for a loan from B of the value of the property - creating a debt which cancels out the value of the asset in A's estate. Arguably you would not be making a GWROB as you owned the property as a result of the repurchase. So s103 says that to the extent that you provided the asset in the first place the debt is reduced on a £ for £ basis so cancelling the benefit of the scheme.

Part 2 follows


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By Paul Soper
16th Apr 2007 15:33

Part 2 read on from part 1 below

Unfortunately that is what happened in the Phizackerley case but with the added complication of Mrs Phizackerley's death first. He had bought the whole property and given the half share to her, she died first, her exors allowed him to take the property back, subject to the debt - and that of course is exactly what s103 prohibits. Had he died first there would not have been a problem as he was the donor of the first gift and the rule only applies to the person who made the original gift. Had she acquired her half share for consideration the original transfer would not have been a gift, and that is why some of the commentary has focussed on whether she made, or did not make, a contribution towards acquiring it.

Had the solicitor's not been desperate to convey a whole interest to him there would have been no need for the loan and the charge, and the provisions would not have applied, presumably with him and the exors of the wife's estate coexisting as owners under tenancy in common - is that really so terrible? Before 1996 it would have been owned in that form as a trust for sale but the Appointment of Trustees and Trusts of Land Act 1996 ended the concept of the Trust for Sale with its implied obligation to sell and replaced it with a simple Trust of Land that permits the co-owners to retain the property.

So to finally answer your questions -

1 - it doesn't just apply where there is a discretionary trust - its the loan in exchange for the interest in the property previously gifted which is the problem.

2 - I don't think it does as long as they are happy to co-exist as owners under a tenancy in common.

3 - A right to remain will cause a different problem because it creates an interest in possession which, at the moment, is subject to the transitional rules in FA2006 and is still taxed as part of the estate of the person with the interest as a transitional serial interest. From April 2008 the right to remain would fall within the new rules and proncipal and exit charges would apply - but of course at very reduced rates.

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By dhartles
16th Apr 2007 16:24

Slight correction...
...to point 3 of Paul Soper's comments:

I think a right to remain left to spouse will always now be in the spouses estate as an interest in possession - as an immediate post death interest (IPDI) under the new rules.

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By Paul Soper
16th Apr 2007 16:59

Well spotted DH
Yes you are quite right - it will be - I'll slap my typist's wrist - ouch!

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By andyprentice
16th Apr 2007 17:09

thank you...
.. the commentary is helpful. I specifically queried with a solicitor whether a right to remain creates an interest in possession - the solicitor said it did not. But it did appear to me that a trust must be created because the beneficiaries have to hold the property jointly with and for the benefit of the survivor.

Quick call to the solicitor needed....

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By Paul Soper
17th Apr 2007 12:54

Andrew
Note that are using the term Right to occupy - a right to occupy can arise simply because you are a joint owner - this will not create a trust, but solicitors like to give a sole right to occupy which does involve creating a trust. Its the difference I suppose between right with a capital R and without!

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By AnonymousUser
17th Apr 2007 12:12

Twas always thus, but what if..........?
S103 has always lurked in the background to catch estate equalisation measures where the recipient "equaliser" dies first.

I know the Daily Mail headline was something like, "Gordon Brown ate my trust", but the case simply seems to reinforce the long held view of S103.

It does not however seem to affect the following measures which have historically avoided S103.

Mrs P's share of the property (in fact the whole of her residuary estate after the NRB trust) is left into an interest in possession trust to the benefit Mr P.

The executor/trustee of the IIP(who is not the surviving spouse) then gives the trustees of the NRB trust a charge on the property.

Using this method it is the executor/trustee who gives the charge and not the surviving spouse who had originally made the gift.

This always seemed to work, does it still?

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By andyprentice
17th Apr 2007 17:07

Thanks Paul
Contacted solicitor and she agreed that what she had in mind originally would have created an IIP, so will remove that as not needed.

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By gbuckell
20th Apr 2007 16:26

S225 relief
There have been discussions elsewhere about whether it is possible to claim s225 relief where the beneficiary of the trust is also a co-owner of the property. The charge scheme avoids this possible problem as well as giving more control over the property to the surviving spouse.

However, is the Phizackerley decision effectively saying that the charge scheme is dangerous, i.e. 50% chance of failure, where the facts are similar (and it strikes me that this set of circumstances cannot be that unusual)?

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By User deleted
20th Apr 2007 14:55

Goodbye SP10/79
One of the unanticipated and welcome results of FA2006 was to remove the impact of SP10/79. This somewhat moth - eaten Revenue practice was to argue that where a beneficiary occupied trust property under a trust power to do so, then ipso facto that beneficiary acquired an IIP in the property. This was the driving force behind the substitution of a debt in the NRB for an interest in the matrimonial home., to avoid the NRB trust assets inadvertently being included in the estate of the surviving spouse.

This is not what happened in Phizackerey, where it was the loan which was not allowbale as a deduction from the suirviving spouse's[husband's] estate.

The consensus was that you could not at one and the same time avoid SP10/79 and enjoy s225 relief for CGT.

All of that has now disappeared, so that a surviving spouse occupying a share in the matrimonial home in a discretionary NRB trust does not thereby enjoy an IIP, whilst s225 relief still applies.

A very cautious approach will provide that the surviving spouse will be excluded form benefit under the NRB discretionary trust for four months from the date of death

Of course in prcatice this will have no impact, especially where they occupy the home by virtue of being a co-owner anyway.

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