Our previous news item dealt with the possible changes that the Chancellor would make relating to businesses in the Budget on 17 March.
The Pre-Budget Report also included a proposed income tax charge on “preowned assets” which was intended to stop artificial transactions to avoid Inheritance Tax.
It now appears that this proposal could affect arrangements involving gifts between spouses. Many married couples have set up discretionary will trusts to ensure that a husband and wife both make full use of the nil rate threshold. One spouse will often hand over a share of his or her home, or other assets, to the other. It now appears that the spouse who gives away his or her share could face an annual tax charge on the transfer from April 2005. If, for example, a husband owns the marital home, worth £500,000, he could hand over half of the property to his wife. They would then own £250,000 each as tenants in common. When the first spouse dies, his or her share of the assets passes into a discretionary will trust. The surviving spouse can still live in the house, but when he or she dies the assets held in the trust do not count as part of the estate.
If the new charge is imposed, the husband in the above example will have to pay income tax on the assumed rental value of the £250,000 transferred. Higher rate taxpayers who have set up the schemes could face a charge of £7,000 a year based on an implied market rent of £17,500.
The wording in the Pre-Budget Report was very confusing and it was unclear which schemes would be affected. Most of us assumed that gifts between spouses would not be hit but the Revenue have now said that they would only be exempt if they are “innocent”. Transfers made for the purpose of avoiding IHT are therefore unlikely to be regarded as innocent.
The statement by the Inland Revenue that they “will not tax legitimate transactions between family members” and the statement that the “legislation is designed to prevent complex tax avoidance scams where people are hiring accountants to deliberately avoid the taxes everybody else pays” does nothing to clarify the position.
Once again we will have to wait and see exactly what Mr Brown will do on 17 March. It is clear that this Budget will contain clauses that will affect many of our clients.
We will have details of the contents of the Budget on this website shortly after 17 March.
Although it is difficult to give any definitive advice ahead of the actual Budget if there are any points you would like to discuss with us please contact us using the contact section of this site.
Clive Jones – Clifford Towers, Chartered Accountants
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