pre-owned assets income tax and inheritance tax - June 2005
It has always been best advice that an individual’s assets should be continually reviewed for inheritance tax purposes. This ensures that the levels of the nil rate band, currently £275,000, of which assets can pass to your beneficiaries following your death, without being subject to inheritance tax are considered. Additionally, your wills should be reviewed regularly to ensure that they are up to date with any changes that may affect the tax position, and that an individual's wishes will be effected on their death. We are advising our clients to review their wills every one to two years, particularly after a Chancellor’s budget when significant changes occur.
Following the last budget and Finance Act 2004 a new taxing regime was implemented which will commence from April 2005. This is an income tax charge on individuals who have continued to enjoy the use of assets after they have given away ownership. It is known as the pre-owned assets income tax charge. It is understood that the Inland Revenue will look at the period of time from the 17th March 1986 and any tax charge will need to be included on an individual’s self-assessment tax return. The first return being April 2006, with any tax due in January 2007.
Income tax charge on land, property and chattels: a charge to income tax will arise where an individual now occupies land or property that was the subject of a previous gift. Also, if the proceeds of a disposal of that gift have been invested in other assets and the individual now enjoys an interest, a tax charge will arise. All chattels also need to be considered, There is no de minimus value. Tracing ownership of chattels may create difficulties.
Basically the government claims that it will levy income tax on people who have sought to avoid future inheritance tax by entering into contrived arrangements to dispose of valuable assets, while retaining the ability to use them. This new regime is obviously very complex, and as the legislation comes into effect, the practicalities will become clearer.
Any inheritance tax planning should be reconsidered. There are still a number of arrangements which continue to be beneficial. Potentially exempt transfers of cash and other exempt gifts and the 7 year ‘window’, commercial sales of equity and utilisation of some of the relief currently available. The annual exemption of £3000, small gifts to £250, marriage gifts and gifts out of income.
Will planning is essential, particularly with married couples. The distribution of assets and any income arising from these should be reviewed continuously, to ensure that personal allowances are maximised and age allowances are not lost wherever possible.
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