At the beginning of the 2005 - 2006 tax year new legislation came in to force to curb inheritance tax avoidance in the UK.
The legislation, which was introduced at the last minute despite having been in discussion for a number of years, was not properly detailed or explained to financial advisers or the general public before its introduction and has created a tide of panic.
The investment industry as a whole lobbied against the introduction of the legislation at such short notice and without proper explanation but they were unsuccessful, and since the 6th of April the financial services industry have struggled to advise and protect their clients and have declared the legislation unfair and discriminatory.
The legislation makes the whole task of estate planning and establishing trusts for IHT avoidance purposes that much more complicated for an individual to get to grips with. In fact, it has been specifically designed to stop people making contrived plans for the ‘disposal’ of pre-owned assets for IHT avoidance purposes whilst retaining usage of the assets.
As the estates of more and more people become potentially liable for IHT as property prices and people’s overall net worth increases yearly, so the tax man will profit to even greater degrees now that fewer people will be able to reduce their overall IHT burden. Inheritance tax is charged at 40% on the entire excess of the deceased’s estate over £275,000 (tax year 2005 - 2006). This excess figure is set to rise to £285,000 for the tax year 2006 - 2007 and then to £300,000 for the next tax year.
A typical example of a solution previously implemented to alleviate an inheritance tax burden which would now be targeted is the double trust. Many parents established a trust into which they placed “pre-owned assets” e.g., their house; the beneficiaries of the trust would be the children after the death of the parents. Provided the parents lived on for seven years after they placed the home into trust the assets would pass tax free to the children. Once the house was placed in trust however, under the old legislation the parents would be able to continue to benefit from it by remaining resident in it for example.
Under the new legislation people who continue to benefit from an asset after it is ‘disposed of’ will be charged income tax. The taxation will be based on an annual rental figure that a tenant or user of the benefit would be charged. Other affected solutions and policies include “key man” life assurance policies taken out by business partners for example and trust arrangements that use life assurance policies as the underlying investment. This list is not exhaustive.
When you consider that even those UK domiciliaries who live or retire abroad and have overseas assets can be affected by UK IHT and also by this legislation on their worldwide assets you begin to see how far reaching and extreme this new legislation is. Even those who have already disposed of pre-owned assets or who have established structures to protect their beneficiaries from an IHT burden may be expected to begin paying income tax back dated to 6th of April 2005 depending on their circumstances.
The whole situation is a nightmare! And it is being compounded by the general confusion that is growing among affected individuals and by the total lack of information that has been forthcoming in any great way from the Inland Revenue and media.
But…there is a certain degree of good news…there are ways to reduce income tax liability, to reduce inheritance tax liability, to secure assets so they will be passed in accordance with your wishes after death and to rearrange or readjust existing policies or solutions to protect against this legislation.
However…as an individual you will need to seek totally personalized and targeted assistance because the solutions that are available are complicated, they may not be applicable, you may have to weigh up pros and cons of solutions based on very personal factors such as your age and health and you will need the assistance of a financial expert to implement solutions available.
Even if you have solutions in place already you may need to ensure that you have not automatically become liable for an increased income tax burden following the introduction of the legislation on the 6th of April.
If you are unsure of whether you need advice or assistance it is a case of doing nothing potentially costing far more! A good independent financial adviser will offer you a complete financial review completely free of charge. Even if he identifies areas of concern for you, you are under no obligation whatsoever to act on the advice you receive…but at the very least, such a review of your own personal inheritance taxation situation will give you a detailed understanding of what can and should be done.
Wherever in the world you live, if you would like Shelter Offshore to put you in touch with an independent financial adviser with whom you can discuss this or any other financial matter, please complete our offshore advice form and we will contact you at your earliest convenience.
