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Phizackerley ruling will effect all trusts making loans to beneficiaries

The recent high profile Phizackerley ruling on inheritance tax and will trusts has far-reaching implications for all trusts making loans to beneficiaries, warns Skandia.

Although the Phizackerley case involved the use of a share in the family home within a will trust, Skandia says the same principles can also be applied to any trust arrangement where a beneficiary receives a loan from the trust rather than receiving a sum of money outright.

Making loans is a common financial planning strategy in this situation because it ensures that, should the beneficiary die, the money they received from the trust that they have spent will lessen their remaining inheritance taxable estate because the loan must be repaid to the trust.

Skandia head of tax and financial planning Colin Jelley says that when setting up any trust arrangements, including discounted gift trusts, loan trusts and will trusts, advisers need to remember to ask whether the settlor’s spouse- or any other beneficiary of the trust- has made substantial prior gifts to the settlor at any time since Budget Day 1986 and ensure this is factored into their recommendations.

Jelley says against the backdrop that residential property accounts for over 40 per cent of all assets on which IHT is paid, the Phizackerley case is the latest in a long list of signals that government is wary of IHT planning schemes that involve the family home.

He says: “This is likely to increase the focus on IHT planning strategies which involve investment portfolios rather than bricks and mortar.

“However, this case also has wider implications for other trust arrangements making loans to beneficiaries.

“Advisers must remember that any prior substantial gifts from the beneficiary to the settlor may limit the effectiveness of this planning strategy.”


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