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One Careful Owner

The main thing that makes people think about Inheritance Tax is the value of their house - for most people, if they could get the house out of charge, they wouldn't have to worry about the tax at all. This year's Budget included a very strange new rule to try to stamp out a particular type of IHT planning - giving something away, but still using it. The idea of the plan is that you pay IHT on what you own when you die, so you give things away in advance - but if you can still use them, you haven't lost anything. The plans have been particularly relevant for houses. In some situations, the IHT rules on 'gifts with reservation' catch this sort of 'not proper gift' and charge you IHT anyway. But clever lawyers have designed a number of different plans that avoid the IHT charge, and some of these have been held to work in the courts. The Revenue have become tired of only closing the stable door after the horses are out, so they have come up with a new idea. They will now charge income tax on the current use of the asset, if you used to own it and no longer do, or you contributed to the cost of buying it. This is a new and very strange rule, and the law is extremely complicated. It should be reasonably clear that it catches most people who bought a scheme to get their house out of the IHT net in this way. What is less clear is whether it will catch many other people who have done something that wasn't deliberately intended to avoid tax. The rules are so unclear that it's possible. They don't apply until next April, so it's not yet possible to know how the Revenue will use them. If you think you might be caught by the rules - if you use an asset which you used to own and gave away, or you use an asset where you paid for someone else to buy it - it will be worth checking the impact of the rules. We will be pleased to advise you. The rules in Schedule 15 FA 2004 are too complex even to summarise in this short article. They are intended to discourage, rather than to prevent, IHT avoidance - if your IHT plan succeeds in getting around the rules on gifts with reservation of benefit (so avoiding a 40% IHT charge when you die), you will suffer a 40% income tax charge every year until you do die. You will probably therefore choose to jump back into the IHT frying pan out of the income tax fire. Those many people who have effected arrangements intended to remove their houses from their estate are clearly likely to be caught, and they should know that they have a problem and take advice. It is not clear whether many other people will fall foul of the rules through having unwittingly done something that is covered, without positively intending to avoid IHT. That is a difficulty which will have to be assessed as the new rules come into effect and are policed for the first time by the Revenue. It may be several years before we have a clear idea of how this will be done in practice.