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The Implications of Income Tax Charge on
Estate Planning
by Miss Janine Byrne
Overview
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 Charge
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 apply if;
The asset was gifted before 8th March 1986
The asset is owned by the transferor's spouse
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 top).
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 Charge
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?
Conclusion
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.
JsByrne
LLB (Hons) LPc.
www.Draft-Your-Will.com
Miss JsByrne holds a Bachelor of Law degree with Honours & a post-graduate
diploma in Legal Practice. Also gained qualification in Wills Writing & is the
owner/author of www.Draft-Your-Will.com and DYW Wills & Estate Planning
Newsletter.
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