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Human Rights Act opens up a new can of tax worms

The Human Rights Act came into force across the whole of the UK on October 1. It allows rights arising under the European Convention on Human Rights to be enforced in UK courts.

The Act been described as the biggest single change in UK law for three centuries (Jean Eaglesham, Financial Times, September 2/3, 2000), as well as a field day for crackpots, a pain in the neck for judges and legislators and a potential goldmine for lawyers (Lord McCluskey).

The latter prediction may not be too much of an exaggeration. Looking particularly at taxation, there are a variety of rights enshrined by the Act which might conflict with current tax legislation.

Within a few days of the Act coming into force the first writ was issued, claiming discriminatory treatment in that widows&#39 bereavement allowance (an allowance withdrawn as from April 5, 2000) was available only to women.

Rights which might be cited in conjunction with the prohibition of discrimination are the protection of property and the right to respect for private and family life.

The right to the enjoyment of property might allow challenges to whole areas of tax legislation. These could be made on the grounds that people are, for example, being deprived of their property to meet a tax liability which is extreme.

An example of this could be the annual tax charge on the deemed growth on a personalised offshore bond. The policyholder is taxed on compound growth at 15 per cent, which may bear no relation to the actual growth achieved.

The right to respect for private and family life might be cited in conjunction with allegations of unjustifiable discrimination to attack areas of the tax system which are discriminatory – between married and unmarried couples or between different sex or same sex couples.

There are several areas of the tax system which might be seen as discriminatory in favour of married couples. Inheritance tax is probably the area which has attrac-ted the most attention recently. Where both parties to a marriage are UK domiciled, assets can be passed between spouses either during life-time or on death completely free of IHT.

Taxes on death will generally arise only once for a married couple – on the death of the second to die. Another bonus is that the exemption for lifetime transfers means planning activities such as the equalisation of estates can take place in a tax-free environment.

This allows maximum use of exemptions and reliefs, including the annual exemption for transfers of up to £3,000 per individual and the nil-rate band (currently at £234,000).

Contrast this with the position for an unmarried couple, where both estates will be subject to taxation on death and where any transfer of assets to allow for further planning would have its own IHT implications.

It is not only IHT that discriminates in favour of the married couple. Capital gains tax also does so, in that assets can be transferred between spouses without the gift giving rise to CGT liabilities. A transfer between couples who are not married must be treated as a transfer at open market value, with tax liabilities arising as appropriate.

There is certainly plenty of scope for challenges to the UK tax system using these and other rights now enshrined in domestic law.

The courts will, of course, have to bear in mind the interests of the community as well as the interests of the individual, and may be less keen to interfere than in other areas of law.

Although the enforcement of the new Human Rights Act makes for interesting times, in reality the pace of change may prove to be slow.

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