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Summer 2004 Bulletin

Inheritance Tax Planning

Rising property prices have led to many houses being worth more than £263,000 and so potentially liable to inheritance tax on the death of their owners. To avoid this potential liability, many people have been recommended, often by their family solicitor, to enter into complex arrangements designed to allow them to continue living in the house while making an immediate, tax-free gift to their children.

The new Finance Act destroys the viability of most such arrangements by imposing an income tax charge on the annual value of the right to occupy the property retained by the original owner (or owners, in the usual case of a married couple). The problem is that the new income tax charge is imposed on existing as well as new arrangements, so many people will have a liability that could not have been foreseen when the arrangements were made.

The new charge does not come into force until April 2005 and those affected will have the option of avoiding the income tax charge by opting back into inheritance tax. In some circumstances other options may be available, such as unscrambling the omelette altogether.

People who have entered into these arrangements will have to consider what action they should take, but as the opt-back does not have to be made until the filing date for 2005/06 Tax Returns (31 January 2007), there is no need to rush the decision. Over the coming months, further official guidance and expert commentary on the operation of the new legislation will become available.

More generally, it makes all tax planning far more difficult, as we have been put on notice that future anti-avoidance legislation may do more than simply block tax mitigation schemes – it may well impose new liabilities in an unpredictable and almost capricious way.

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