Enter Your E-mail

TaxationWeb by Daniel Feingold

For anyone who has carried out any inheritance tax planning, the law could be about to change dramatically. You could face an annual income tax charge as a penalty for carrying out such planning. This is particularly so for those who have used the Double Trust Scheme to save inheritance tax on their family home. I outline the proposed new Pre-Owned Assets law , how it has arisen and why it is against Human Rights Law and must be prevented from coming into being.Double Trusts and the new Pre-Owned Assets Income Tax.

THE PROBLEM.

Since I wrote about the Double Trust Scheme for avoiding inheritance tax on valuable homes in October; the Revenue have attacked such schemes in the December 10th 2003 Pre-Budget report.

The seemingly innocuous statement about Pre-Owned Assets now potentially means anyone who has given away an asset(at anytime!) and continues to enjoy a benefit from it, will pay an annual income tax charge equal to the market value of the asset.

The effect for those who have carried out a Double Trust Scheme is as follows:
Suppose a house valued at £500,000 has been placed in a Double Trust Scheme and according to local surveyors it can be rented out for say £24,000 a year. The effect of the new rules coming into effect on April 2005 is that an individual will have to pay tax at 40%on that value. That would mean an annual tax bill of £9,600, until the individual who has made the gift dies, or the Double Trust Scheme is dismantled.

The Revenue have said that any arrangements that are dismantled by April 2005 (the date the new tax is introduced) will not be taxed. For nearly all, unscrambling will not be an option; as this will probably trigger a capital gains tax charge and possibly a stamp duty charge at 4% and without any specific concession from the Revenue, will in most cases be impractical.

Whilst many commentators have focussed on all the potential situations where this proposed tax can bite; I think it is important to show why it is fatally flawed and even if introduced will produce such complexity for both Taxpayers and the Revenue; that it will have to be withdrawn.

HOW HAS IT COME ABOUT.

Readers who have carried out either the Double Trust (or a Reverse Ingram Scheme), both coming within this proposed new tax may want to understand how such a draconian tax charge could have been proposed and what they can do about it.

Firstly, I think it is useful to understand what has triggered this total overreaction by the Revenue.

For many years, there was an understanding between those who advised on tax planning and the Revenue as to the state of play.

A few specialist tax Barristers, Solicitors and Accountants would often find loopholes in tax law. They would then discreetly offer these tax-planning ideas to a small circle of colleagues and their clients. If the Revenue didn't like a particular idea they would challenge it through the courts, all the way up to the House of Lords. If they lost, they would then change the law in their favour in the next annual Finance Act.

In the last few years, the Revenue often couldn't wait for the Courts. (It can take anywhere from 3-7 years for a case to reach the House of Lords) and they started blocking loopholes, when they found them: This was especially so in areas where the tax losses were potentially running into the tens of millions of pounds.

The way tax planning ideas reached clients also started to change. Some Accountants and Solicitors started to market tax planning ideas like any other investment product.
So, tax planning moved from the discreet to the heavily promoted, or marketed.
The incentives were (and are) the huge fees that selling products can offer against charging on an hourly rate.

The Financial Institutions also recognised the profit potential and using IFA's as their distributors; started selling tax products as well.

This is primarily what has angered the Revenue because the numbers of people taking up these tax-planning ideas has multiplied tenfold, as these marketing driven organisations seek ever more sales.

This became evident in the area inheritance tax with the tax planning offered by virtue of the decision in the EVERSDEN case.

As far as the Double Trust Scheme goes, it appears from press reports that between 30,000 and 50,000 people or more may have taken it up. One Accountancy firm has admitted to selling it to over 800 clients and it certainly wasn't the biggest promoter, by any means!
The Revenue estimate of those affected is of course far lower and claims the law is targeted only at a very few wealthy millionaires!

It is important to understand what has caused the Revenue to react as they have, but that does not mean that their proposal is fair, reasonable or even workable. They are making the individual taxpayer the victim of their anger with those responsible for marketing these tax-planning ideas.

Many Professionals have already made representations to the Inland Revenue by way of a consultation process (that is standard procedure), but I want you to know that there is only one way to stop this proposed legislation (which will be revealed in full in the Chancellors Budget on March 17th 2004.)!

THE ACHILLES HEEL.

The proposed Law has an Achilles Heal that has not been fully appreciated by the Revenue and which really makes it a non-starter: - Its RETROSPECTIVE!

That means that it is a law that effects events (and in this case tax planning) that took place before it was introduced. Generally such laws whilst not automatically struck down, are frowned upon as they do not enable a person to know what the consequences of their actions are at the time they carry out that course of action.

The arguments against Retrospective laws were strengthened in the UK with the Introduction of the Human Rights Act 1998 that incorporated the European Convention on Human Rights into UK Law.
Article 1 of the first protocol to the Convention guarantees the individual a right to the peaceful enjoyment of his possessions.

When Retrospective tax laws interfere with the right to enjoyment of possessions, then it must serve a legitimate purpose and not be disproportionate. That means that although the Government can theoretically introduce Retrospective tax legislation it must not do so in a way that results in unfairness to the taxpayer.

The Pre-Owned Assets proposed law would in my view do just that because it introduces an income tax charge to counter inheritance tax planning!

Taxpayers would face an income tax charge not just on Double Trust Schemes, but also on any transaction however long ago, where they gifted an asset, but reserved an interest or benefit.

The Revenue have acted in the past when small sections of tax law have been shown to be Retrospective in effect and have agreed not to impose them in that way.

Also there is an obligation on the Government under the Human Rights Act 1998 to certify that all new laws are compatible with the European Convention on Human Rights. And all new bills before parliament need a "Statement of Compatibility" to that effect. The Government will be hard pressed to include such a statement in the light of European Case law.

HELP THE FIGHT AGAINST IT.

What can readers who are affected directly do?

I would strongly urge you to take the time to write to your local MP. You can point out the unfairness of this Retrospective law and how it is in breach of the Human Rights Act.
Perhaps you can also outline how it will affect you personally.

Ask them also to consider raising the issue in Parliament and with the Revenue.
Point out that it will be part of the Chancellor's Budget on March 17th 2004!

Even if the proposals on Pre-Owned Assets do become law, there is still the strong likely-hood of a court challenge under the Human Rights Act.
That will require funding and if there is anyone who wants to join together to form an action group, they should contact me by e-mail on sedrate@easynet.co.uk

Daniel M Feingold
Barrister-at-Law (NP)
February 2004