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A consumer&#39s view

The Treasury&#39s move to clamp down on inheritance tax avoidance schemes which seek to get round the gift-with-reservation restrictions is not entirely unexpected.

Promoters of these schemes, mostly big firms of accountants and solicitors and high-net-worth advisers such as St James&#39s Place, must have known that to actively promote such a blatant tax avoidance device was bound to end in tears.

But it does set a dangerous precedent. For virtually the first time in living memory, the proposed legislation is retrospective and could leave some IFAs with substantial compensation claims, depending on how they marketed the schemes and what caveats were written into the advice.

An estimated 30,000 high-net-worth individuals have taken out so-called Eversden defeasible life interest schemes and IOU-type trust schemes in the expectation that they would avoid inheritance tax on the assets in these schemes and, more important, still live in the family home or enjoy income from other assets put into such schemes.

But Chancellor Gordon Brown announced a consultation paper on pre-owned assets in his pre-Budget speech just before Christmas. It sounds innocuous enough but the effect could be devastating for advisers and their clients who have entered into these IHT avoidance schemes.

What the Chancellor proposes to do is apply an income tax charge from April 2005 on anyone who gives away an asset but continues to enjoy benefit from it. For example, someone who has entered into an IOU-type scheme with a family house worth £600,000 could find themselves being taxed on the rental benefit in kind at around £25,000 a year.

The problem is that it is not easy to unwind these schemes and in some cases it is impossible. If the family house has been put into such a scheme and the beneficiaries are, say, minor grandchildren or children, the trustees could be charged with gross negligence if they allow the asset to be returned to the donor.

Even worse, there could be a huge capital gains tax charge if the asset is not the principal private residence of the beneficiaries of the trust. Most of the family homes put into these schemes would have been worth at least £500,000 and house prices have risen dramatically over the past five years. The value today could easily be £800,000 and there could be a capital gains tax bill of £120,000 and a stamp duty charge of £32,000 when the property is conveyed back to the original owner.

The upshot will be that some people will have to sell their homes to meet these charges.

Does the Treasury intend this and did advisers warn of these possible problems when schemes were taken out? No one is going to weep too many tears for the Speechly Birchams of this world, even if they do end up forking out compensation, but to introduce retrospective tax legislation sets a dangerous precedent and we should all be concerned about this.

If the Chancellor is prepared to go ahead with this legislation and impose it retrospectively, what else might he do? Next time round it might not be relatively wealthy homeowners who get caught but ordinary employees going about their everyday business.

All donors of pre-owned assets are potentially affected because of the retrospective nature of the proposals.

It is also difficult to understand why the Inland Revenue advised the Treasury to go about things in this way unless it very definitely intended to catch those who have already entered into these IHT avoidance schemes.

Instead, the Treasury/Inland Revenue could easily enshrine in law the legal precedent of the Vestey tax avoidance case. This effectively said that where the sole purpose of a series of associated transactions is to avoid taxation, the Revenue has the powers to look through these transactions and impose tax as though the scheme had never been set up. This would be by far the most effective means of putting a stop to all these artificial tax avoidance devices.


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Guide cover

Guide: how to… communicate with your pension members

Effective communication of your pension scheme is a large part of getting auto-enrolment right. Delivering the same message to all employees is not necessarily the way to go. To assist you with the communication of your pension scheme, we have provided some key areas to think about, such as:

  • What to consider when segmenting your workforce
  • How to communicate to pension scheme members at the right time in their member lifecycle
  • What topics you should be discussing with your pension members
  • The new pension freedoms and the importance of communicating them


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