Families who have set up one of the most popular types of inheritance-tax (IHT) saving schemes are being warned that they could be left with an unexpected bill after a landmark court win for the taxman.

Hundreds of thousands of married couples have set up trusts through their wills, known as discretionary will trusts, because they were believed to be one of the few remaining ways to cut IHT on the family home.

However, a ruling by the special tax commissioners means some families will discover their plans are worthless. What many will find most dismaying is that the rule change will be applied retrospectively, hitting schemes set up in good faith. Accountants believe it may also fly in the face of equal rights legislation.

Peter Nellist at Clarke Wilmott, a solicitor, said: “The Revenue is clearly under pressure to maximise the IHT take and is looking for any technical point to drag in as much tax as possible. Any family where a nonworking spouse dies first is in danger of being caught.”

The popularity of will trusts has soared as millions more families have been pushed above the tax threshold. IHT, levied at 40 per cent on the value of estates worth more than the nil-rate band of £300,000, has become a problem for four in ten households, according to Scottish Widows, the insurer. It claims that 10m families, or 41 per cent of homeowners, are at risk as the IHT threshold has failed to keep pace with house prices.

Discretionary will trusts seemed to offer a solution for married couples who wanted to make sure their children’s IHT bill would be reduced.

Take a husband and wife with a £600,000 home. When the husband dies, his wife will have no IHT to pay because transfers between spouses are tax-free. When the wife dies, though, her estate will be taxed at 40 per cent on assets above £300,000 — a tax bill of £120,000.

A discretionary will trust, however, uses both the husband and wife’s nil-rate bands so that the entire £600,000 property is free from tax. But a test case against Stephanie Phizackerley has thrown many families’ tax plans into turmoil. She faces a bill of £60,000 after being told that the trust her parents had set up is useless, even though they seemed to have followed all the rules.

When Phizackerley’s mother died in 2000 the £150,000 value of her half-share of the family home was passed into a will trust to use up her nil-rate band. Under the scheme her husband was able to continue living in the house by owing the trust £150,000. However, when he died in 2002 the Revenue claimed the debt was invalid. As a result the £150,000 that had passed into trust on the mother’s death would be liable for 40 per cent IHT after all.

It argued that because Stephanie’s mother had not worked during the marriage she had not contributed to the share she had gifted to the trust. The Revenue said her husband had paid for it and it could not be used to reduce the value of his estate.

The order of death is important. Had the “working” husband died first, the will trust would have worked fine.

Nigel May at MacIntyre Hudson, an accountant, said: “It’s a ludicrous situation: you are all right as long as you die in the correct order.”

The family do not intend to appeal but Mike Warburton of Grant Thornton, an accountant, believes the ruling could be challenged on the basis of equal rights. He said: “They are in effect saying that because the woman did not work she made no financial contribution to the household, which is a totally out-moded concept. On divorce, for example, it is generally assumed that a couple are entitled to an equal share.”

In the meantime, couples who set up will trusts are being advised to document, where possible, the financial arrangements used to purchase their home. This should include any large one-off payments, for example from an inheritance, as well as income contributions towards the repayment of the mortgage.

HOW THE SCHEMES WORK

- Discretionary will trusts are employed by married couples to use both their inheritance-tax (IHT) allowances.

- You must own your property as tenants in common, not joint tenants.

- Take a married couple with a £600,000 home. When the husband dies, the house will pass to his wife with no IHT because transfers between spouses are tax-free. When the wife dies, her estate will be taxed at 40 per cent on assets above her IHT allowance of £300,000 — a tax bill of £120,000.

- Alternatively, they could draft their wills so that on the death of the husband, assets up to his allowance (£300,000) pass into a trust for the couple’s heirs. To avoid selling the house, the wife would owe the trust the £300,000.

- When the wife died, the trust would call in the loan, which would be deducted from her estate and pass to the heirs IHT-free.

- The remainder of the estate (£300,000) falls within her nil-rate band, so there is no tax to pay — a saving of £120,000.

- Will trusts are different from home loan schemes, which were banned in 2005 because the latter are set up while both of you are alive and so are deemed artificial.

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