A New Wealth Tax

A new wealth tax

For some years, the Inland Revenue has been concerned at the sheer number of individuals who were entering into plans in order to avoid Inheritance Tax at 40% on their death. Historically, anti-avoidance legislation has been introduced piecemeal as various means of avoidance came to light. A new approach has now been adopted, which is arguably retro-active, if not retrospective. The Finance Act 2004 introduced a new tax charge (a 'Pre-Owned Assets Tax') which comes into force on 6 April 2005. From that date a charge to income tax may be levied on individuals who have transferred assets in circumstances where they continue to benefit from those assets.

In this issue, we will look at situations that may be caught by the new rules and suggest some options for reducing both the Income Tax and Inheritance Tax (IHT) charges going forward.
What is caught by the new tax?
The legislation appears to be aimed at catching the more obvious IHT avoidance plans used in relation to the family home such as:
'Eversden' plans - Typically an individual makes a gift to a trust giving his spouse a life interest in the home which is then terminated in part in favour of the children, although both the donor and his spouse continue to live in the property.
Double trust schemes or 'home loan plans' - This involves an individual creating a settlement from which he can benefit and selling the home to that settlement in return for a loan note. The individual then gives away the loan note on further trusts, but continues to live in the home throughout.
Reversionary leases - This is where the donor grants a long lease in his property that does not begin until a future specified date (say 21 years from the date of the gift). The donor continues to live in the property during the 21 year period, but the value of the property in his estate is reduced by the value of the lease.
• A parent giving cash to a child who purchased the home in which the parent is now living.