Special commissioners decision casts doubt over effective inheritance tax planning techniques
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HMRC amnesty
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The Special Commissioners have recently published their decision in the case of Phizackerley versus HM Revenue & Customs (HMRC).

The appeal centred around whether a debt would be allowed as a deduction in arriving at the value of an estate for IHT purposes and unfortunately the Commissioners found in favour of HMRC who had contended that it was not an allowable deduction for this purpose.

The particular facts in the case were as follows:-

1. Dr Phizackerley was a fellow of Balliol College, Oxford and until his retirement both he and his wife resided in accommodation provided by the college.
2. On his retirement the couple purchased a property in their joint names, changing this at a later date to become tenants in common.
3. Mrs Phizackerley had not worked during their marriage and it was accepted that the funds used to purchase the property were derived from savings accrued by Dr Phizackerley during his working life.
4. Mrs Phizackerley died in April 2000 at which time her estate comprised her half share in the family home.
5. Not untypically her will provided that a value equal to the IHT Nil Rate Band be left on Discretionary Trust with the balance being left absolutely to her husband who survived her.
6. In order to satisfy the Nil Rate Band legacy, Dr Phizackerley agreed to give the trustees of the Discretionary an IOU equal to £150,000 (indexed linked) on the basis that he would then take possession of the half share of the house owned by his late wife.
7. Dr Phizackerley died in July 2002 and his estate included the house but claiming a deduction for the amount due to the Discretionary Trust.

HMRC's argument was that as Dr Phizackerley had provided the funds with which to purchase the house in the first place then certain anti-avoidance legislation should apply which prevents an allowable deduction in circumstances where that asset is in effect being transferred back to him subject to a debt.

Counsel on behalf of the taxpayer (James Kessler QC) argued that the original gift from Dr Phizackerley to his wife (the cash or the house) was covered by section 11 IHT Act 1984 – dispositions for the maintenance of the family because the house "provided a roof over his wife's head".

The Special Commissioner rejected this argument on the basis that this exemption did not apply. He said "I do not consider that when a husband puts a house in joint names for himself and his wife during their marriage it is within the ordinary meaning of maintenance. In spite of Mr Kessler's persuasive argument, I do not consider that the disposition is for maintenance in this case".

It is not known at this point whether there will be an appeal made against this decision.

It also remains to be seen how HMRC will seek to apply this principle in the future particularly in situations where there may have been partial contributions by each spouse and perhaps, several changes of family homes and changes in family circumstances.

We hope that HMRC will provide guidance in this respect but in the meantime it is imperative that the potential impact of this decision is considered in your future IHT planning arrangements.

You may have read, or seen in the press, commentary regarding an HM Revenue and Customs (HMRC) amnesty.

This has been introduced by HMRC following their success in obtaining powers to require banks to disclose details of offshore bank accounts. It is clearly HMRC's belief that there are many undisclosed offshore accounts and to encourage proactive disclosure by tax payers, they have announced an offshore disclosure facility for those with undeclared liabilities arising from offshore accounts and structures. By structures they are including within the amnesty those with offshore assets such as property assets where the income from this has also not been declared.

The amnesty requires full disclosure and full tax payable but confirms the penalties are guaranteed at just 10% of the tax arising.

In fact, a careful review of HMRC's announcement reveals that in fact this guarantee of a 10% penalty is now available to any tax payers with undisclosed tax liabilities, not just those with offshore accounts or structures, provided they comply with the amnesty disclosure time limits.

The deadlines announced by HMRC are that by 22 June 2007 anyone wishing to take advantage of the offshore disclosure facility must register an intention to make a disclosure.

By 26 November 2007 the actual disclosure must be submitted and payment made.

By 30 April 2008 HMRC will confirm if the disclosures have been accepted or rejected.

We hope you find the above interesting, and if you have any further queries please do not hesitate to contact our tax partners Steven Strauss - stevens@simmonsgainsford.co.uk or Darren Hersey - darrenh@simmonsgainsford.co.uk