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When the Poat comes in

As house prices have risen, there is evidence that inheritance tax will affect more people.

The number of estates liable to IHT in 2003/04 is estimated to be up
by 55 per cent on 1998 and by 25 per cent on 2002/03.

The Government takes more in tax revenue from IHT than capital gains
tax – around 2.5bn in the last tax year.

Since the Government came to power in 1997, property prices have
risen by 84 per cent while the IHT nil-rate band has risen by only
18.6 per cent.

More than 1.5 million houses are in the IHT net.

For many people, their home is their most highly valued asset. If its
value presents a potential IHT problem, planning needs to revolve
around it. Evidence suggests that an increase in effective planning
with private residences (substantially founded on the lifetime
double-trust/IOU scheme) was the motivator for the latest Government
action in this area in the shape of the pre-owned assets tax (Poat).

Effective planning can occur either:During lifetime, with the house
owner making some form of gift direct or via a trust orOn death, with
each of a married couple – having split ownership of their property
by having a tenancy in common – making a gift of their interest
direct to beneficiaries or via a trust.

But planning to reduce IHT using the private residence is easier said
than done due to the gift with reservation provisions, legislation to
counter particular plans and the Poat – and all this without
considering the possible CGT implications.

Gift with reservation provisionsPlanning based on lifetime gifts was
made more difficult after the introduction of the GWR provisions in
1986, providing that a gift will be ineffective for IHT purposes if
the donor continues to enjoy a benefit from it. Since the potential
donor usually wishes to continue to occupy the property, an
IHT-effective gift will often be impossible. Regardless of these
provisions, disposing of the principal private residence during
lifetime will often be ill-advised in practice.

Legislation preventing the use of spousal interest trusts (s185
Finance Act 2003)It was possible to avoid the GWR provisions where a
donor gifted assets to a trust under which the spouse had an initial
interest in possession. Even if the settlor could benefit under the
trust, the GWR provisions did not apply, even if the initial interest
of the settlor’s spouse was terminated, other beneficiaries acquired
the primary benefit and the settlor remained a potential trust

The Court of Appeal decision in CIR v Eversden, followed by the
amendment to the legislation in s185 Finance Act 2003 to prevent IHT
planning using spousal interest trusts (also called defeasible
interest trusts), illustrates the Government’s determination to
prevent schemes it believes to be abusive.

Pre-owned assets rulesIn last year’s pre-Budget report, the
Chancellor announced the intention to combat IHT avoidance schemes
where assets are disposed of but the previous owner continues to
enjoy benefits without making a commercial payment – schemes that
continued to be effective despite the GWR provisions and legislation
in s185 Finance Act 2003. The proposal was to impose income tax on
the benefit of a free or low-cost enjoyment of a previously owned
substantial capital asset, similar to a benefit-in-kind charge on an
employee enjoying free accommodation provided by an employer.

But the press release issued was vague. One interpretation was that
the charge would apply to land and buildings. Another was that it
could potentially apply to any asset and in a number of circumstances
which it was thought were not intended, including where the asset had
been disposed of for consideration as well as transactions which took
place many years ago.

In March 2004 the revised proposals were issued:A free-standing
income tax charge will apply from April 6, 2005 to the benefit a
donor enjoys by having free or low-cost enjoyment of assets they
formerly owned or provided the funds to purchase.

The charge can apply to both tangible assets (land and chattels) and
intangible assets (say, life insurance policies).

The charge can apply regardless of when the property was disposed of
as long as it was after March 17, 1986.

A number of exemptions and exclusions apply where:- The property
ceased to be owned before March 18, 1986.- Property formerly owned by
a taxpayer is currently owned by their spouse.- The asset counts as
part of the taxpayer’s estate for IHT under the GWR rules (the
taxpayer is one of the beneficiaries of the trust established).- The
whole property was sold by the taxpayer at arm’s length.- The
taxpayer was owner of the asset only by virtue of a will or intestacy
which has subsequently been varied by agreement between the
beneficiaries.- Any enjoyment is no more than incidental.

In the case of tangible assets, the former owners will not be
regarded as enjoying a taxable benefit if they retain an interest
consistent with their ongoing enjoyment, say, after a gift of a share
in the property to a child who lives with them.

These provisions are embodied in schedule 15 Finance Act 2004. Poat
operates as a free-standing income tax charge under case VI of
schedule D and is based on the benefit received by the former owner.
For example, if the property is a house, the charge is based on the
rent they should be paying.

It is essential to consider how these provisions apply in relation to
gifts of land including whether the gift is within the charging
provisions, if it is covered by any exclusions or exemptions and what
arrangements are caught by the provisions. These questions will be
considered next week. If this were an episode of Eastenders, this
would be what has become known as a Doof-Doof moment.


Charcol draws up a new cast for the passion play

The return of John Garfield and Charles Wishart to Charcol 30 years after they helped to set up the firm will bring back the passion that made the company renowned, says the new board.

Richard Verdin on Protection

With the benefit of hindsight, I guess most mortgage advisers wish they had taken a month’s holiday starting on November 1. If they had, they might well have avoided the business issues caused by a number of lenders in dealing with key facts illustrations and adviser registrations, which together with the slowdown in housing transactions combined to make November the worst month on record for many small mortgage and insurance businesses.

Recording sickness absence cover - thumbnail

White paper — recording sickness absence

The latest figures from the Department for Work and Pensions illustrate that sickness absence is still a major cost to businesses, with an annual bill for sick pay and associated costs to employers of £9bn. This paper from Jelf Employee Benefits looks at the importance of recording sickness absence for any employee health strategy and how this can be carried out in an efficient manner to reduce absence, improve employee engagement and drive up profits.


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