June 2007

IOU nothing, nothing at all

Dear Editor,

Having been involved in the area of trusts and estate planning for more than 35 years, I am writing to advise my fellow capital tax advisers about an important decision relating to inheritance tax (IHT) which has just been issued by the Special Commissioners.

It only applies in certain circumstances but where it does, it can have dramatic effects on the amount of inheritance tax payable.

The decision affects routine inheritance tax planning using a nil rate band trust. What is at stake is currently £120,000 - the amount of inheritance tax saving using the nil rate band.

The decision applies in circumstances such as where one party to a marriage purchases a property in his or her sole name (or provides the deposit) and that person is the only one who pays the mortgage.

If the property is later transferred into the joint names of the husband and wife the recipient spouse leaves a will with a nil rate band trust. When that same spouse dies the nil rate band trust is satisfied and an IOU is given by the surviving spouse to the executors and trustees of the deceased spouse, who was the donor.

Consequently, on the death of the surviving spouse, the debt due to the nil rate band trust of the donor is claimed as a debt against the estate of the donee.

Following the decision, it is possible that such a debt will not be allowed as a debt available against the estate of the surviving spouse. Thus, on present rates, the cost would be a further £120,000 inheritance tax.

If the facts apply then it is possible to draft the wills of the two spouses in a different way or to administer the estate without using an IOU in order to maintain the nil rate band advantage.

To take this new court decision into account, Lane-Smith & Shindler LLP in Manchester (of whom I am a founding partner) advise consumers to look very carefully at the history of all their financial dealings with each other and at the terms of their wills.

Geoffrey Shindler
Partner
Lane-Smith & Shindler