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Pushing the Poat out – Tony Wickenden

In my last column, as well as looking at schemes involving property that do not appear to be caught by the new pre-owned assets rules, I started to look at schemes that are caught by the rules.

Perhaps the best known of these – at least as a result of its relatively widespread marketing up to the date of the last Budget – was the double trust or IOU scheme which I looked at last time.

Another scheme that appears to be caught is the reversionary lease scheme. Under this planning device, the freeholder of a private residence creates and then makes a gift of a deferred long lease. The right of the lessee to occupation under the lease would be deferred for, say, 15 to 20 years. The donor would retain the freehold reversion. Hopefully, the lease would not commence until after the donor’s death. On the donor’s death, the freehold would have a depressed value due to the existence of the lease, which would be due to begin relatively soon after the death of the freeholder.

Paragraph 3(4) Schedule 15 Finance Act 2004 states that the creation of a new interest in land out of an existing interest in land will be taken to be a disposal of part of the existing interest. This brings in the basic charge under that paragraph which, in broad terms, applies where an individual continues to occupy land after a disposal or part disposal of it, otherwise than as an excluded transaction. Therefore, unless the individual pays an appropriate market rent, it seems that the transaction will be caught by the new provisions.

Now let us have a look at carve-out schemes. No look at carve-outs can be complete without coverage of the important case of Ingram vs Commissioners of Inland Revenue (1998). In this case, a carve-out scheme in relation to the late Lady Ingram’s main residence was upheld by the House of Lords as not being a gift with reservation. Broadly speaking, Lady Ingram transferred the property to her solicitor, who executed declarations that he held the property as her nominee. Thereafter, he granted her a 20-year lease and the freehold was transferred to a family trust.

Although these schemes were blocked by the Finance Act 1999, any pre-1999 carve-out schemes still running would seem to be caught by the basic Poat charge under Paragraph 3 Schedule 15. It will therefore be necessary to review the list of exempted transactions in Paragraph 11 to see if they provide any assistance in any particular case. In particular, Paragraph 11(1) excludes a disposal by way of gift into a trust in which the donor still has an interest in possession. Unless this condition can be satisfied, Ingram-type carve-out schemes will be caught.

It would seem that Ingram-type schemes can still operate to avoid the gift with reservation rules if the gift of the interest is made at least seven years after the interest has been created and the donor survives that gift by a further seven years (Section 102A(5) Finance Act 1986). There is no similar exclusion from the pre-owned asset rules in Schedule 15.

Let us now look at Eversden schemes (prior spousal interest schemes). In Commissioners of Inland Revenue vs Eversden & Another (Greenstock’s Executors) (2002), the Court of Appeal upheld the effectiveness against the reservation of benefit rules of an arrangement whereby assets are initially placed into trust where the settlor’s spouse has an interest in possession and that interest is later revoked so that the children have an interest in possession, with the settlor/settlor’s spouse being potential beneficiaries. Paragraph 8 Schedule 15 Finance Act 2004 is intended to catch these arrangements where the assets in the trust are intangibles, that is, investments).

Paragraph 3 applies the Poat charge to schemes involving land. The income tax charge on pre-owned assets will, however, not operate for so long as the spouse continues to have an interest in possession in the trust or if the settlor has such an interest. This exclusion also applies if the spouse had an interest in possession which ceased on his or her death. Of course, if the plan is caught by the gift with reservation rules, the Poat rules will not apply.

It is generally accepted that the latest onslaught on property-based inheritance tax schemes has substantially diminished the range of propertybased planning that can be carried out in an IHT-effective way. Before moving on, though, it is worth remembering that in any IHT planning involving property, it is vital to take important legal issues into account.

In the case of married couples, the majority of private residences will be owned in joint names so it is important to consider the nature and consequences of this method of owning property.

English law recognises two forms of beneficial co-ownership, namely:Joint tenancy.Tenancy in common.

While in both cases each beneficial co-owner is as much entitled to possession of any part of the property as the other, there are two essential differences. First, under a joint tenancy, each co-owner can only have an equal interest in the property. In the case of a tenancy in common, it is possible to have unequal shares.

Second, in the case of a joint tenancy, when a co-owner dies, his interest passes automatically – irrespective of any will which he may leave – to the surviving co-owners. However, in the case of a tenancy in common, the share of a joint owner passes on death in accordance with his will or the laws of intestacy.

For married couples, beneficial joint tenancy is often preferable since, in the event of the death of one of them, no probate or other formalities are required in respect of the property. However, for tax planning purposes, particularly where gifts or legacies of the property are intended, a tenancy in common will be the most useful and most flexible form of joint ownership.

I will look at this in more detail next week.

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