Tax clampdown on equality in marriage
Bigger tax bills on the horizon!

Thousands of couples could be affected by an HM Revenue and Customs (HMRC) clampdown which may leave their heirs with a bigger bill for inheritance tax (IHT).

A ruling made public recently by the Special Commissioners, the body which settles disputes between HMRC and taxpayers, said that non-working spouses who did not contribute financially to building up a couple’s assets could not take advantage of a commonly used device to shield some of this wealth from IHT.

IHT is taxed at a rate of 40 per cent on all estates above £300,000 (the nil rate band) for the current 2007/08 tax year.

One of the most common measures is for couples to split their estate in two and hold the family home, typically their biggest asset, as tenants in common. This allows them to pass some of their wealth out of their estate, IHT-free, when the first spouse dies, leaving less for the taxman to take when the second spouse dies.

This was the method used by Dr Patrick Phizackerley, an Oxford don, and his wife Mary, the couple in the test case. They had carried out some fairly common IHT planning which meant that, on Mrs Phizackerley’s death in 2000, a half-share worth £150,000 of the family home was placed, in the form of an IOU, into a discretionary trust for the benefit of her family.

This was designed to remove £150,000 from the couple’s estate on the death of the first spouse. If, instead, the asset had simply been passed across to Dr Phizackerley this would have resulted in a larger estate and a larger IHT bill on his death.

But John Avery Jones, a Special Commissioner, decided that because Mrs Phizackerley had been a non-working spouse she would not have provided any of the money which went towards buying the family home. Therefore the measure designed to pass part of its value out of the estate on her death was ruled invalid and the £150,000 was judged to have remained in the couple’s estate, resulting in a bigger IHT bill - £60,000 more - when Dr Phizackerley died in 2002.

Had Dr Phizackerley died first he would have been entitled to dispose of his share of the house using the above method because he did contribute money towards its purchase and the couple would have achieved a substantial reduction in the IHT bill on their estate.

A HMRC spokeswoman said: “The decision was made on the basis of the individual facts of this case. The Special Commissioner found that the particular circumstances fell foul of long-standing anti-avoidance provisions in the IHT regime.”

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Levels and bases of, and reliefs from, taxation are subject to change.
Article date: 06.07