The Implication of Income Tax Charges on Estate Planning
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In the Pre-Budget Report of
December 2003 the Chancellor Gordon Brown announced proposals to levy an Income
Tax charge from 6th April 2005 in those circumstances where the transferor of an
asset retains and interest or continues to benefit from that asset. In the
instance of real property, the 'benefit' envisaged is the transferor continuing
to reside in the property he/she has allegedly given away.
How the Charge Applies
The Government refer to such
assets as 'pre-owned assets' and, broadly speaking, its intention is to tax the
'annual value' of such assets as a benefit-in-kind on the former owner still
enjoying the use of the asset. The annual value on which the charge is based
will be the open-market rental for a property or a fixed percentage of the
capital value of most other assets to which the new charge applies. Any amounts
which the transferor pays for the use of the asset - rent for example - will be
deducted from the annual value in arriving at the taxable benefit.
The charge will also apply if
a person provides the funds to purchase an asset which they go on to enjoy the
benefit of after 5th April 2005.
Rationale Behind the
The charge is intended to
counter many Inheritance Tax planning schemes, but unfortunately, it will also
impact many innocent and unintended victims. Thankfully, the legislation has
included some exceptions to the application of the charge. The charge will not
The asset was gifted
before 8th March 1986
The asset is owned by the
The asset is, in fact,
still caught by the 'Gifts with Reservation' rules and as such Inheritance
Tax applies instead (hence, the Income Tax charge will not be levied on
The asset was sold at an
arm's length price for cash (even if to a connected party).
The transferor of the
asset had themselves inherited it and their ownership had ceased as a result
of a Deed of Variation affecting that inheritance.
The transferor's continued
enjoyment of the asset is merely incidental or has arisen only as a result
of an unforeseen change in family circumstances.
The annual taxable benefit
(after deducting any contributions by the transferor, where necessary) does
not exceed £2,500.
The Inland Revenue have also
confirmed that the charge will not apply in most cases where a taxpayer has
funded life insurance policies held on trust. Finally, there is also an 'Opt
Out' option whereby the transferor can opt not to pay the charge provided the
asset is included back into their estate and therefore consequently being
subject to Inheritance Tax.
The Implications of the
Most of the Inheritance Tax
Planning techniques usually involve a widow or widower having continued
enjoyment of their former spouse's share of the property and thus it would
appear on first inspection that in the majority of cases the charge would not
apply as the transferor themselves would not be around to continue to enjoy or
benefit from the property.
However, a problem seems to
arise where a couple own their property as joint tenants prior to commencing
their tax planning strategy and subsequently changing their ownership title to
tenants in common. Where the widow or widower formerly owned the property as
joint tenants they had a share in ownership of the whole property. This means
that the new Income Tax charge could conceivably apply to their continued
occupation of the property after their spouse's death.
A possible consequence of this
for the future might mean that instead of acquiring property as joint tenants
which has been the general rule, the wise policy would be to own the property as
tenants in common instead. But how many people are aware of this distinction?
Will legal advisors be prepared to explain the tax implications of acquiring
property with the different legal titles?
How far will the new charge
impact on current Inheritance Tax Planning schemes? As yet, it is too soon to
tell, as the rules have not been fully fleshed out and as yet, it is too soon to
say with any certainty what will happen and which schemes will be affected.
But it seem fair to argue that
the current Labour Government is doing its utmost to tax its citizens at every
possible turn. Inheritance Tax avoidance schemes - indeed any tax avoidance
scheme -are not unlawful. Planning for the future does not mean that people are
engaging in tax evasion - which IS unlawful. But the policies being employed
leave an uncomfortable impression of an angry parent chastising their child
simply for being astute and planning for the future!
Needless to say, the whole
approach leaves a somewhat bitter taste in one's mouth.
About the AuthorJsByrne
LLB (Hons) LPc.
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Article Published/Sorted/Amended on Scopulus 2006-06-09 23:34:00 in Legal Articles