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Practice Areas
Trusts & Tax Law |
Trusts and Tax New Inheritance Tax Legislation Income tax may now be charged on the retained benefit of various schemes whose aim was to allow individuals to dispose of valuable assets whilst retaining the ability to use them. These schemes primarily relate to the family home. The house price boom has seen a record number of people – an estimated 2 million - become liable for Inheritance Tax (IHT) on the value of their home alone. Typically, the ownership of the home may have initially been given away to avoid inheritance tax, but the donor still occupies it and benefits from the property, either free of charge or at a rent less than the market rent. The subject of such a scheme is known as a "gift with reservation of benefit" and the schemes are called "double trust schemes". Also caught are schemes whereby the person sets up a life-interest trust, and reversionary lease schemes. All these are effectively designed to achieve the same goal. The final rules are to be retrospective and will apply to anything given away after 1986. Any item “given away,” but which an individual continues to use or enjoy in some way, will now be deemed a benefit to them and taxed accordingly. Anyone caught by these rules will have to pay an income tax charge based on the market value of the benefit. There are, however, a number of proposed exemptions to the rules: parents who have helped buy a property for their children but who eventually end up living with them, are likely to be excluded; there is an exclusion for joint occupation, where the donor and recipient occupy the same property and the recipient has been given a share in the home to look after an elderly parent, in return for a share in the house. Other exceptions include gifts between husbands and wives, and where the terms of a Will are changed after death by a deed of variation. For those caught by the rules, it is possible to “unscramble” the tax avoidance arrangements before next April so they are not caught by the new income tax charge. Alternatively there is a window of time for people to decide whether to live with an annual tax charge or to elect for the asset to be treated as still in their estate for IHT purposes. Originally that election had to be made by 31 January 2007 but the 2007 Budget relaxed that requirement - without making it clear what the deadline is now. There are still various simple ways of avoiding IHT - one example is to make regular gifts out of normal income. This will not affect IHT, provided your standard of living is not affected. You can give away £3000 a year and this can be back-dated one year (so you can give away £6000 one year, and £3000 in each year after that); and you can still take advantage of “potentially exempt transfers” which allow you to give away as much as you wish free of tax, provided you live seven years after doing so. The best approach is to plan ahead and take advice frequently to avoid IHT biting into assets that increase in value.
The lawyers to contact at Ambrose Appelbe to discuss inheritance tax or any other matter relating to tax or family finances is Felix Appelbe and Andrew Penfold. Contact them on 020 7242 7000 or use the Contact Request Form. © Ambrose
Appelbe 2004-2007 |
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