Article - saving tax
The Implication of Income Tax Charge on Estate Planning
by Janine Byrne
Pre-Budget Report of December 2003 the Chancellor Gordon Brown announced proposals to levy an Income Tax charge
from 6th April 2005 in those circumstances where the transferor of an asset retains and interest or continues to
benefit from that asset. In the instance of real property, the 'benefit' envisaged is the transferor continuing to
reside in the property he/she has allegedly given away.
How the Charge Applies
The Government refer to such assets as 'pre-owned assets' and, broadly speaking, its intention is to tax the
'annual value' of such assets as a benefit-in-kind on the former owner still enjoying the use of the asset. The
annual value on which the charge is based will be the open-market rental for a property or a fixed percentage of
the capital value of most other assets to which the new charge applies. Any amounts which the transferor pays for
the use of the asset - rent for example - will be deducted from the annual value in arriving at the taxable
benefit. The charge will also apply if a person provides the funds to purchase an asset which they go on to enjoy
the benefit of after 5th April 2005.
Rationale Behind the Charge
The charge is intended to counter many Inheritance Tax planning schemes, but unfortunately, it will also impact
many innocent and unintended victims. Thankfully, the legislation has included some exceptions to the application
of the charge. The charge will not apply if;
The asset was gifted before 8th March 1986
The asset is owned by the transferor's spouse
The asset is, in fact, still caught by the 'Gifts with Reservation' rules and as such Inheritance Tax applies
instead (hence, the Income Tax charge will not be levied on top).
The asset was sold at an arm's length price for cash (even if to a connected party).
The transferor of the asset had themselves inherited it and their ownership had ceased as a result of a Deed of
Variation affecting that inheritance.
The transferor's continued enjoyment of the asset is merely incidental or has arisen only as a result of an
unforeseen change in family circumstances.
The annual taxable benefit (after deducting any contributions by the transferor, where necessary) does not exceed
The Inland Revenue have also confirmed that the charge will not apply in most cases where a taxpayer has funded
life insurance policies held on trust. Finally, there is also an 'Opt Out' option whereby the transferor can opt
not to pay the charge provided the asset is included back into their estate and therefore consequently being
subject to Inheritance Tax.
The Implications of the Charge
Most of the Inheritance Tax Planning techniques usually involve a widow or widower having continued enjoyment of
their former spouse's share of the property and thus it would appear on first inspection that in the majority of
cases the charge would not apply as the transferor themselves would not be around to continue to enjoy or benefit
from the property.
However, a problem seems to arise where a couple own their property as joint tenants prior to commencing their tax
planning strategy and subsequently changing their ownership title to tenants in common. Where the widow or widower
formerly owned the property as joint tenants they had a share in ownership of the whole property. This means that
the new Income Tax charge could conceivably apply to their continued occupation of the property after their
A possible consequence of this for the future might mean that instead of acquiring property as joint tenants which
has been the general rule, the wise policy would be to own the property as tenants in common instead. But how many
people are aware of this distinction? Will legal advisors be prepared to explain the tax implications of acquiring
property with the different legal titles?
How far will the new charge impact on current Inheritance Tax Planning schemes? As yet, it is too soon to tell,
as the rules have not been fully fleshed out and as yet, it is too soon to say with any certainty what will happen
and which schemes will be affected.
But it seem fair to argue that the current Labour Government is doing its utmost to tax its citizens at every
possible turn. Inheritance Tax avoidance schemes - indeed any tax avoidance scheme -are not unlawful. Planning for
the future does not mean that people are engaging in tax evasion - which IS unlawful. But the policies being
employed leave an uncomfortable impression of an angry parent chastising their child simply for being astute and
planning for the future!
Needless to say, the whole approach leaves a somewhat bitter taste in one's mouth.