Nil-Rate Band Discretionary Will Trusts: The Potential Pitfalls

A recent tax case has highlighted the need to review wills regularly and to ensure that they continue to provide what is intended.

As mentioned in the earlier article on IHT planning, it is recommended practice that married couples and civil partners use both of their IHT nil-rate bands. This may include a provision in both wills to create nil-rate band discretionary trusts, which include the surviving spouse as a beneficiary, helping to allay fears over future financial security.

The arrangement works very well if there are surplus assets, but more and more couples are being brought into the IHT net because of the increasing value of the matrimonial home. In such cases, the practice is for the trust to be established by means of the surviving spouse succeeding to the property in exchange for a debt or by charging the property to the trustees.

The Phizackerley Case

A recent tax case, Phizackerley v HMRC, focused on an anti-avoidance rule which stops debts in an estate being deducted when calculating the amount subject to IHT to the extent that they are derived from property which in turn came from the estate. For example, a father gives £100,000 to his daughter, who then lends him £100,000. On the father's death, the debt of £100,000 would not be allowed as a deduction from the value of his estate.

In the Phizackerley case, the matrimonial home had been bought in joint names, but the purchase was funded entirely by Dr Phizackerley. On his wife's death, the executors passed her interest in their home to Dr Phizackerley in return for his promise to pay the trustees of the discretionary will trust an amount equal to...