The big – no, enormous – event for estate planners this year has undoubtedly been the introduction with effect from April 6, 2005 of the pre-owned assets rules.
These rules impose an annual income tax charge on the benefit enjoyed by the donor (often a settlor) of an asset, tangible or intangible, where the gift is not otherwise caught by the gift with reservation provisions. Under the GWR provisions, the asset continues to be included in the taxable estate of the donor who reserves a benefit, so the gift is ineffective for inheritance tax purposes.
There has been much debate among tax planners, promoters of tax-avoidance schemes and the Inland Revenue over which transactions are caught and which are exempt from the new provisions. We at Technical Connection have been deeply involved in this debate, as I hope you would expect.
While by no means the only assets to be affected by the new provisions, property and insurance-based schemes have vied to be the most discussed category among financial advisers.
The debate in standing committee concerning schedule 15 of this year's Finance Bill, which contains the detail on the pre-owned assets rules, gave some further insight into Government thinking on the legislation on this subject.
Paymaster General Dawn Primarolo confirmed that the measures in schedule 15 are directed at “avoidance involving the contrived use of trusts”. The Government was concerned specifically with schemes that allow wealthy taxpayers to give away assets – or achieve the appearance of doing so – and so benefit from the relaxed rules for lifetime gifts while in reality retaining enjoyment of and access to those assets.
It was suggested that there could be more than 30,000 taxpayers who have used such schemes. Assuming they involve assets valued at around £500,000 on average, that adds up to a substantial amount of wealth outside of IHT.
While it might be understandable that the Government wishes to block some avoidance schemes, the Finance Bill seems to go a lot further than that, in particular, in the context of trusts used with financial products. One area of concern is the business trust typically used in share purchase planning. In most cases, the context in which these trusts is used is wholly commercial so there is no donative intent and no element of bounty. Further clarification from the Revenue on the application of these provisions to business trusts is awaited with interest.
The new tax will apply from April 6, 2005 to all dispositions made after March 17, 1986. This prompted accusations of retrospection but these were squarely rejected by Primarolo, who said: “Retrospective measures in tax law seek to make a charge on benefits that have already accrued but schedule 15 does no such thing. Only the benefits that accrue from 2005/06 will fall within the charge. If the legislation were retrospective, it would backdate the charge to March 1986 for accrued benefits over the entire period but the Government did not seek to do this.”
If the taxpayer does not wish to pay income tax from April 2005, they can make an election to have an arrangement treated as subject to the GWR rules.
One argument pointed out that when IHT law was changed to combat avoidance schemes such as those introduced by Lady Ingram or Eversden, schemes set up before the relevant date were safe.
Primarolo said she could see the arguments for saying schedule 15 should have no application to transactions established before last December, when the proposals were first announced, but she rejected them. She did not see the logic of singling out those cases for special treatment.
The Government believes schedule 15 can quite properly extend to existing structures and it is essential that it does if packaged tax-avoidance schemes are to be brought under a measure of control. Given that there are tens of thousands of existing structures which do not fit the Ingram or Eversden specifications, if the Government is prepared to go so far as to charge all of them, there is no reason why it should stop at those cases. In short, all post-1986 schemes are caught.
Primarolo confirmed that this new tax is aimed at people who have circumvented current IHT rules or who will do so in future. It is clear from everything the Government has published and what Primarolo said during the committee stage that it is determined to deal with such avoidance.
She said: “The reason why the provisions in schedule 15 are so complex is because the schemes to which they seek to respond are complex. It is not the tax system that has decided to become ever more complicated but the schemes to which it is responding.”
She reiterated that the law is designed to counter cases where the owners of valuable properties set up a complex structure to get rid of their ownership for tax purposes while retaining enjoyment of the property. But that does not mean all structures are suspect and should be caught under schedule 15. Primarolo said: “Some of them are set up for good non-tax reasons, do not try to avoid inheritance tax and do not do so.” Such cases are, of course, excluded from the provisions.
Next week, I will look further at the new provisions, especially the treatment of single-premium investment bonds, which appear to have been singled out for particular criticism.