I have just learned that the new Budget made some important changes to the law on inheritance tax. It rules out certain avoidance methods that have become popular in recent years - in particular certain types of gifts. Moreover these changes appear to be retrospective, nullifying some arrangements that many people have put in place over the last few years. Apparently - I am told - people whose wills contain these avoidance measures will have to make some important decisions before the new tax year begins on April 6th.
I haven't yet been able to find out the exact details of these changes and what they imply for inheritance planning (and for existing wills). Can anybody help?
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T
Troy Steadman
Here's a bit of info:
Pre-owned assets Back in December 2003 the government announced its intention to legislate against what it saw as inheritance tax (IHT) avoidance.
New measures effective from 6 April 2005 introduce an annual income tax charge in circumstances where an individual has been able to remove an asset from their estate for IHT purposes but still continues to be able to enjoy the use of it or to benefit from it. These new rules come as the Inland Revenue?s response to the successful use of IHT saving schemes particularly in relation to the family home. The new rules apply to land, chattels and certain interests in trusts.
The annual income tax charge is based on the value of the benefit from using the asset, ie its rental value. Logically there will be a deduction for any rent actually paid and a de minimis threshold of £5,000. Other exclusions cover situations where:
the asset still counts as part of the taxpayer?s estate for IHT purposes or the asset was sold at an arm?s length price, paid in cash. In addition individuals who have already entered into a scheme now caught by the new rules can elect to avoid the income tax charge and accept instead that the asset is still in their estate for IHT purposes.
Action Point
Despite the fact that the new regime is only effective from 6 April
2005, it can apply to arrangements that may have been put in place at any time since March 1986. Existing schemes need to be reviewed to see if the new charge will apply.
Comment
Although the start date for the new rules is almost upon us, there are still questions as to how the regime will operate in practice, in particular the question of valuing assets, which will always be subjective. This raises concerns that practical issues relating to the application of the regime will not be addressed until after it becomes fully operational in April.
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