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TaxationWeb by Daniel Feingold

Following the Budget Yesterday. Daniel Feingold explains why the Inland Revenue's Pre-Owned Assets Income Tax is despite some very minor concessions still a retropsective measure in breach of Human Rights Law and needs to be challenged.The Budget and the new Pre-Owned Assets Income Tax.

1: Introduction

Well, the Inland Revenue have pressed ahead with the Pre-Owned Assets Income Tax and with the headlines grabbed by other issues in the Budget, the impact of serious tax raising measures like this appear to have slipped past the media.

The reason perhaps, despite its retrospective nature (in breach of human rights law), nobody has quantified the potential annual stealth tax this measure can achieve.

So, that's where I'm going to start. As I mentioned in my previous piece an estimate of 30-50,000 people affected by this measure is probably on the cautious side. On an annual basis from April 6th 2005: I estimate that an extra ?150-?300 million pounds of income tax will be raised by this measure and possibly far more. In addition, if as I outline below many taxpayers opt simply to treat the assets given away, as still remaining within their estates to avoid the income tax charge; then the measure will raise between ?3-4 billion of extra inheritance tax. The only trouble is that nobody knows exactly when they are going to die, so nobody knows when that extra tax will swell the Inland Revenue's coffers!

2: A Few Concessions and Some Detail.

There are some minor concessions on the scope of the measure.

* It will not impact on gifts made before the 18 March 1986 (Prior to the introduction of inheritance tax). That still means that gifts made up to 18 years ago! Yes, 18 years ago! will still create an income tax charge from April 6th 2005 until the donor dies! That is a huge Retrospective sweep and will create many hardships, especially for those whose financial circumstances have changed in the intervening years and who have no legal control over the assets given away.

* If the gift in question has been made to a spouse then it is excluded. This is common sense and really arose out of the fears of some professionals who misunderstood the scope of the measure.


* If the property was sold even to a family member for cash and not loans but at a market value. That again is common sense and derived from the same misunderstanding.

* Any property gifted by will or intestacy that is given away by variation is excluded and this speaks for itself.

* Any incidental use of the property, including for example where a parent gives a property to his child and then ends up living with them later due to ill-health.

* There are various other technical concessions such as if a gift is made of half a house to a child still living there that would not result in an income tax charge. That again is common sense. Also in the context of some life insurance based inheritance-planning products retaining the right to get back the premiums will not create a charge on the value of benefits given away.

* There is mention of valuation issues being resolved by further consultation later on, but valuation issues are going to be critical and this just highlights, how complex and impractical this measure is.


* De Minimis.

This is Latin for things so small that the law will not take them into account. The Inland Revenue promised in the pre-budget report to set this at a substantial level. In fact, the level is ?2,500 so if the annual income tax charge would be ?2,500 or less, there's no income tax to pay. If you assume a 5% yield on property that means that only if you've given away a property worth ?50,000 or less will there be no charge. Consider this in relation to the ?500,000 minimum value operated by most, as the threshold for carrying out a Double Trust Scheme!


* Transitional Relief.

This is the only real concession (if you can call it that!) on offer. If you elect by 31 January 2007 to have the asset treated for inheritance tax purposes as still being within your estate, then no income tax charge will be levied. Bizarrely, the Inland Revenue mention that this is as long as the asset remains within your estate and that you have the right to claim (if appropriate), business and agricultural property relief and to a claim for the property as a heritage asset. This looks like a tax-planning tip from the Inland Revenue! They seem to be saying that if you sell the house or stop living there, you could invest the proceeds in business and agricultural property you can obtain 100% relief from inheritance tax. Also if the house in question is a stately home, you might be able to claim relief as a heritage asset!

I think this is the only really important concession and is one that maybe worth pursuing if the Court challenge I propose below is for any reason, not successful. The time scale for the election is quite generous and we should be in a position to know the outcome of any Human Rights law challenge by then.

3: Help The Fight Against It.

The answer to this proposed measure is that it is still totally retrospective and is an unfair way of dealing with tax planning.

It is a disproportionate reaction to those escaping one tax to subject them to another tax instead. There was no reasonable way anyone could know or guess that the consequences of undertaking this tax planning would result in the imposition of another wholly different tax as a penalty for doing so. European Case law on this area does not support what is clearly still a disproportionate levy that interferes with the peaceful enjoyment of one's property and would I believe rule against it.

The measures remain in breach of Article 1 of the first protocol to the European Convention on Human Rights introduced as law into this country by the Human Rights Act 1988.

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.

This can still be done, as it will not become law until the Finance Bill receives Royal Assent in Late June or early July.

Ask them to consider raising the issue in Parliament and during the debates on the Finance Bill.

If the measure does become law, there is still the strong likely-hood of a court challenge under the Human Rights Act and a pretty good chance of success.

That case will require funding and if anyone would like to join an action group, they should contact me.

Daniel M Feingold
Barrister-at-Law (NP)
March 18th 2004.