The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
INHERITANCE TAX SETBACK
For some years now the standard approach to inheritance tax planning has been to equalise the estates of husband and wife (now that includes civil partners as well) and to provide for the setting up of a nil rate band trust on the first death. In the year 2007/08 this approach saves up to £120,000 in tax on the second death.
The approach is tried and tested and many families have benefited from it. It works like this.
A couple has joint assets of £600,000. The main asset is the house which is owned by the couple as tenants in common. This basis of ownership is fundamental to the planning as it enables each partner to determine how their half share devolves on their death.
The couple write tax efficient wills. Each leaves everything to the other but the assets passing from the estate of the first to die to the survivor carry an encumbrance. That encumbrance is a charge of an amount equal to the inheritance tax nil rate band. The benefit of the charge rests with the trustees of a trust which is established in the will of the deceased.
After the first death the estate of the surviving spouse consists of the house and a liability to pay £300,000 to the trustees of the deceased’s will trust. The value of the surviving spouse’s estate does not increase at all.
On the death of the surviving spouse there is no tax to pay (assuming the value of the house remains broadly equal to the inheritance tax nil rate band – a pretty big assumption). After the second death the house is sold, the charge settled and the trust wound up, leaving the children with £600,000.
Tax practitioners have always been aware that in certain circumstances the Revenue could use some 1986 legislation to undermine this planning. In April this year the Revenue deployed the 1986 law in the case of a Dr Phizackerley and they won.
So what were the facts and why did Dr Phizackerley lose?
Dr Phizackerley was a retired clinical biochemist. Mrs Phizackerley
never had any income. They bought a house
In line with the planning described above, her half share passed to Dr Phizackerley, encumbered by a charge of £150,000 in favour of the trustees of the Mrs Phizackerley Will Trust.
On the death of Dr Phizackerley his executors claimed the £150,000 charge as a deduction from the value of his estate. The Revenue disputed this deduction.
The 1986 law provides that a deduction is not allowed in the estate of the deceased if the funds for the deduction originate from the deceased. Huh? What does that mean?
In very simple terms if I make a gift of £x to you after which you make a loan of £x to me after which I die (let’s ignore the seven year rule) then my executors cannot claim the loan of £x as a liability of my estate because it has only come about as a result of my gift to you.
Mrs Phizackerley never had any income. It was indisputable that she acquired her half share of the house using money provided by her husband. Accordingly, when he died the claim to deduct the £150,000 charge from his estate was disallowed.
Had Dr Phizackerley died before Mrs Phizackerley the planning would have worked.
This is a most unfortunate case. It shows what a shambles and a lottery inheritance tax law has become. In circumstances like those described above your tax planning only works if you die in the right order. Further, the law devalues the contribution made by Mrs Phizackerley. Her contribution to the family was probably just as valuable as that of Dr Phizackerley. It just happens that her contribution could not be measured in financial terms.
Let us hope the government recognises the unfairness here and makes a change to the law. The words pig and fly come to mind, however.
Our Advice: Put the fundamentals in place. Check the basis of ownership of assets. Equalise estates. Get your wills written so they are tax efficient. Then plan to make sure your family does not become a victim of the law which caught out the Phizackerleys. Make a record of the sources of income and inherited wealth which have enabled you (and your deceased spouse, if applicable) to acquire the assets which you own (they owned). Let your executors have a copy of the record.
DOES YOUR EMPLOYER PROVIDE YOU WITH A COMPUTER?
We are not concerned here with a computer located at your employer’s workplace. Rather we are concerned with a computer owned by your employer and made available to you for private use. So in practice that means laptops and home based desktop machines.
you are provided with such a computer you need to be aware of a change to the
law which took place on
your employer provided you with the computer before
your employer provided you with the computer after
Why might and not will?
The law provides that where an employee is provided with asset by an employer and that asset is available for private use, the employee is chargeable to tax on the measured value of the private use.
The guidance issued by H M Revenue & Customs following the change in April 2006 states that there will be no charge to tax where private use of the computer is “not significant”.
What do they mean by this?
Apparently they “..look at the employer’s policy regarding the sanctioning of occasional private use. They allow the exemption where there is a formal policy concerning private use which is clearly stated to employees and employees are not recharged for the private use because it is not commercially viable to do so. Detailed records of private use are not necessary. An important factor is the centrality of what is provided to the duties of employment. If the item is clearly necessary to perform the duties of employment then any private use is unlikely to be significant compared with the business need to provide it.”
In effect the guidance is saying, if you don’t want to be taxed on the private use of the computer, get your employer to introduce a policy which forbids all but occasional private use (and then make sure any other private use is not detectable).
is a sad fact of life that in the
Our Advice: The Revenue has shown you how to escape the effect of the change in the law. Make sure you follow their advice.
NO HONOUR AMONG THIEVES
The coach says to the chairman “My nephew is a really good accountant. He is deaf and dumb but he really knows his stuff. He could do some really creative things with the club’s books. Could you use him?”
The chairman likes the idea. During the interview the coach translates using sign language. The chairman is impressed and hires the coach’s nephew straight away.
Six months later and £5 million is missing.
The chairman wants answers and he asks the coach to translate for the nephew.
Chairman: “I want the £5 million.”
Nephew (in sign language): “I don’t know anything about it!”
Coach: “My nephew says he doesn’t know anything about it!”
The chairman pulls out a revolver and says, “Tell him he’s got 10 seconds to tell me where the money is!”
Nephew: (in sign language): “Stand at the centre spot. Ten paces towards the kop then dig down two feet. It’s in a plastic bag.”
Coach: “My nephew says you haven’t got the guts to pull the trigger!”
Copyright: K P Bonney & Co LLP 2007. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer: The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.
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