HMRC gets tough on couples transferring assets

Thousands of couples look set to be hit by a new Revenue clampdown which could leave their heirs with a bigger bill for inheritance tax (IHT).

That's the message from tax experts who have studied a ruling made public last week by the Special Commissioners, the body which settles disputes between the Revenue and taxpayers.

The Special Commissioners said non-working spouses who did not contribute financially to building up a couple's assets could not take advantage of a commonly used device to shield some of this wealth from IHT.

The latest ruling will send a shiver down the spine of hundreds of thousands of families who have taken measures to reduce the amount of IHT the taxman takes when they die. With IHT now biting at a rate of 40 per cent on all estates above �300,000 (the nil rate band) avoidance of the tax is now a major concern of Middle England.

One of the most common measures is for couples to split their estate in two and hold the family home, typically their biggest asset, as tenants in common. This allows them to pass some of their wealth out of their estate, IHT-free, when the first spouse dies, leaving less for the taxman to take when the second spouse dies.

This was the method used by Dr Patrick Phizackerley, an Oxford don, and his wife Mary, the couple in the test case. They had carried out some fairly common IHT planning which meant that, on Mrs Phizackerley's death in 2000, a half-share worth �150,000 of the family home was placed, in the form of an IOU, into a discretionary trust for the benefit of her family.

This was designed to remove �150,000 from the couple's estate on the death of the first spouse. If, instead, the asset had simply been passed across to Dr Phizackerley this would have resulted in a larger estate and a larger IHT bill on his death.

But John Avery Jones, a Special Commissioner, decided that because Mrs Phizackerley had been a non-working spouse she would not have provided any of the money which went towards buying the family home. Therefore the measure designed to pass part of its value out of the estate on her death was ruled invalid and the �150,000 was judged to have remained in the couple's estate, resulting in a bigger IHT bill - �60,000 more - when Dr Phizackerley died in 2002.

Had Dr Phizackerley died first he would have been entitled to dispose of his share of the house using the above method because he did contribute money towards its purchase and the couple would have achieved a substantial reduction in the IHT bill on their estate.

Mike Warburton, senior tax partner at Grant Thornton, the accountant, said: "This decision appears to fly in the face of years of divorce court judgements which recognise that a non-working spouse makes a real contribution to the overall wealth of a household by allowing the working partner to concentrate on the task of being the breadwinner.

"It is saying that, as far as IHT is concerned, non-working spouses only own assets by virtue of their working spouses' largesse."

A Revenue spokeswoman said: "The decision was made on the basis of the individual facts of this case. The Special Commissioner found that the particular circumstances fell foul of long-standing anti-avoidance provisions in the IHT regime