Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP
Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, comments on how to respond to Ingram schemes and on compliance aspects in the context of the Pre-owned assets regime.The Pre-owned Assets Regime: How to Respond to Ingram Schemes
Context
A taxpayer who did an Ingram style lease carve-out between March 1986 and March 1999 and is therefore caught by the pre-owned assets regime, has broadly four options open to him:(1) retain the scheme and pay the tax;
(2) retain the scheme but pay a market rent (under a legal obligation);
(3) retain the scheme but elect into reservation of benefit; or
(4) bring the scheme to an end.
The cost of the first option may not be that great.
Do the arithmetic
Assume a property worth £1 million with an appropriate rental value of £50,000. The interest disposed of is worth £250,000 on 6 April 2005. This is the value which will be adopted for the first five years of the POA regime. (Incidentally, it is often very difficult to get appropriate valuations out of valuers for POA purposes.) This creates a deemed income of £12,500 which taxed at 40% means a tax charge of £5,000 per annum. The scheme was done six years ago and there is thus 14 years to go before the 20 year lease falls in. There is a chance of significant IHT savings (£400,000, being 40% of £1 million). Such an annual cost may be considered a reasonable price of achieving this, at least for the first five years when the figure is known. A view can be taken at that time on whether to continue on the then value or perhaps to bring the arrangement to an end.(Points made by Catriona Syed of Charles Russell at IBC’s Fourth Annual Private Client Tax Conference in London on 4 July 2005, included in a Meeting Points article in Taxation 8.9.05 p638)
Comment
The deadline for reporting on the application of FA 2004 Sch 15 to arrangements made since 18 March 1986 is still over a year away (31 January 2007, the filing date for 2005/06). But for those who are affected by, and who may be thinking of taking themselves outside, the regime for 2005/06, the clock is ticking away, with over half the tax year now gone. Doing the sums, as best one can (given the point made above that getting appropriate valuations are not always easy), is obviously the first step. But the five year rule for both land and chattels is indeed welcome – assuming of course that values are generally increasing rather than decreasing – especially if the chargeable value can be brought within the £5,000 de minimis per taxpayer.Pre-owned Assets Regime: Compliance
‘Other taxable income’?
It appears that the 2005/06 self assessment forms will contain neither a dedicated box nor a supplementary page for taxpayers to return any income tax liability arising under FA 2004 Sch 15. Instead, such taxpayers will simply have to tick the box at current Question 13 for ‘other taxable income’ and put the appropriate figure into what is now box 13.3. (Presumably the same will apply to those completing the short tax return, where the box will be current 7.1 with no box to tick to confirm a liability.)Comment
Representations have been made, by the CIOT among other professional bodies, that this is inadequate and that greater publicity is required for the new regime (on which public awareness is understood to be low). Ideally, there would be a separate supplementary page or at least a separate box in both the long form and the short form tax returns.October 2005
Matthew Hutton MA, CTA (fellow), AIIT, TEP
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