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The introduction of the Transferable Nil Rate Band by the Finance Act 2008 at first appeared to simplify estate planning. However, the new regime having been in force for some two years now, it appears that it raises more questions and creates more problems than previously thought.
The new rules for the purpose of claiming 100% unused nil rate band on the death of the first spouse assume there have been no lifetime gifts within seven years, no nil rate band discretionary trust in the Will and no legacies in the Will which would effectively use up part or all of the nil rate band allowance on the first death.
The new regime allows the survivor of a marriage or civil partnership to claim 100% of their spouses’/partner’s unused nil rate band only where the entire estate has been passed by Will to the survivor. Where the first to die has left cash or specific legacies in their Will with the remainder passing to the survivor, spouse/civil partner.
Exemption will only apply to the remainder which passes to that survivor, leaving the cash or specific legacies to be absorbed by the nil rate band , possibly resulting in only a portion of the nil rate band allowance to be claimed in the future by the survivor.
To complicate matters further, it is common for a married couple or civil partners to have cash and specific legacies in their Wills in addition to a nil rate band discretionary trust. Whilst it is possible to unwind the nil rate band discretionary trust on the first death and appoint it out to the survivor , in certain circumstances the survivor may not be amongst the class of beneficiaries, and in other cases it may not be possible to appoint it out to the survivor for other reasons.
This may mean that the first to die would have used up their nil rate band on the discretionary trust alone, leaving any cash and specific legacies they may have left in addition, subject to Inheritance Tax on the first death, despite the remainder or residue possibly passing to the survivor and being spouse exempt.
Prior to the Finance Act 2008 many Wills did and still do contain the Nil Rate Band Discretionary Trust, designed to take effect on the first death only. The most common reason for its inclusion being to ensure that the nil rate band of the first spouse to die was not wasted.
The questions today in light of the various issues which may arise are:
a) should the nil rate band discretionary trust be left in place?
b) should the trust assets be appointed to the surviving spouse absolutely?
It is worth bearing in mind that the ability to transfer the nil rate band on the death of the surviving spouse may be withdrawn in future legislation, that the assets of the trust can be protected from being claimed in the future for care costs etc, where assets are likely to increase in value over the years, it may be preferable to include them in such a trust, there may be children of earlier marriages who are required to be catered for. However, there are also reasons for removing the nil rate band discretionary trust from one’s Will in lifetime or appointing it out within two years of the first death in order to provide capital protection for the survivor, to re-instate the nil rate band and ensure that the surviving spouse has full control.
If it is decided to leave the nil rate band discretionary trust in place, one must be aware that even if the residue passes to the surviving spouse, any legacies left in the Will in addition, may become chargeable to Inheritance Tax on the first death. Consideration needs to be given with regard to having both legacies and a nil rate band trust in one’s Will. It may be prudent to consider leaving one or the other to ensure there is at least a part of the nil rate band allowance available for transfer.
THE LASTING POWER OF ATTORNEY V THE DEPUTY ORDER
By making a Lasting Power of Attorney (where you do not have a valid Enduring Power of Attorney in place), you can give someone you know and trust your authority to deal with your affairs should you become incapable in the future. Your Lasting Power of Attorney cannot be used until it has been registered with the Office of the Public Guardian. A Lasting Power of Attorney can either cover your financial affairs or your personal welfare with regard to medical treatment or both. 
It is important that the Lasting Power of Attorney be registered while you are capable to prevent delay at a later date should you lose capacity in the future. The power, until such time as you lose capacity, will run alongside your own right to deal with your assets and to make decisions for yourself. The costs involved are far less than that for a Deputy Order and far less time consuming, ensuring that your power is for use immediately should the need arise.
If you do not have a Lasting Power of Attorney in place (or an Enduring Power of Attorney under theold regime), and you become incapable of dealing with your own affairs, the process of appointing someone to act for you can be a lengthy and costly process. This could result in no one being officially appointed to assist you during which time difficulties may arise on a daily basis as no person would have the appropriate authority to act on your behalf.
This in turn creates unnecessary stress and difficulty for you and your family during this time. Whereas the registration fee for a Lasting Power of Attorney is in the region of £120 (current Court of Protection fees for 2011), the registration of a deputy order is in the region of £400 in addition to the intended deputy being required to take out an insurance bond for an annual premium which varies depending upon the size of the incapable person’s estate.
In conclusion, appointing an Attorney under a Lasting Power of Attorney is much less expensive and time consuming and provides you and your family peace of mind for the future.
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Update Added 2011
News Letter 2010
LASTING POWERS OF ATTORNEY
What happens when a person is no longer capable of handling or managing their own affairs?
“Take professional advice without delay”
Everyone is entitled to a nil rate band allowance on death. This is currently set at £325,000 per person and is subject to any lifetime gifts. The current government has frozen the nil rate band allowance at the current rate for the next three years.
Since the Finance Act 2007 it has been possible to carry forward the proportion of the nil rate band that was not used when the first spouse or civil partner died to the estate of the second spouse or civil partner to die. To use this transferable nil rate band the first death can have occurred at any time, however the second death must have occurred after 9th October 2007.
If the entire estate of the first spouse to die passes to his or her surviving spouse or civil partner the nil rate band allowance of the first to die is wholly unused and can be transferred to the estate of the second to die, potentially doubling the nil rate band allowance available at that time. This effectively means that by today’s rate, in a case where the estate of the second die does not exceed £650,000, there will be no Inheritance Tax payable. Alternatively, if the survivor’s estate exceeds this amount there will at least be a substantial saving in Inheritance Tax.
Married couples or civil partners should ensure that their Wills are correctly drafted to secure the availability of the transferable nil rate band. Lifetime planning is essential.
NEW ADDITION TO OUR TEAM
We are delighted to announce that Michael Fox has joined us as Legal Consultant.
Michael is a Solicitor with many years of experience in dealing with all types of property matters.
He has recently retired from a local firm where he was a partner.
Michael is able to deal with any of our Client’s conveyancing requirements either residential or commercial.
LIFETIME PLANNING
“Provide for your family’s financial
needs in a way that permits
maximum flexibility over a period of years
with a minimum tax burden”
Lifetime Discretionary Trusts have specific features and benefits for the individual who wishes to plan for the future beyond the transferable nil rate band allowance. No one beneficiary is entitled as of right to the trust fund. This is because the settlor (the individual who sets up the trust) gives the trustees absolute discretion to pay income or capital or both to some or all of a class of potential beneficiaries defined in the trust deed.
The important point of a discretionary trust is that providing the value of the gift is below the nil rate band threshold, no lifetime inheritance tax of 20% is payable and providing the settlor survives a period of seven years from the date of the gift, the amount gifted will fall outside of their estate for inheritance tax purposes on their death.
Discretionary trusts are a very flexible tax planning tool. The main objective is to provide for the individual family’s financial needs in a way that permits maximum flexibility over a period of years with a minimum tax burden. Often the individual may wish to make gifts but is undecided as to how much to give each beneficiary. The discretionary trust route is the ideal vehicle.
Seek professional advice before making a decision.
DISCRETIONARY TRUSTS
An Interest in Possession trust otherwise known as a Life Interest Trust is also a useful tax planning tool. A nominated beneficiary has an interest in the income from the trust assets or the use and benefit of the trust assets for the duration of their life or upon the occurrence of a specified event, whilst the capital is protected for another beneficiary or other beneficiaries. This is a particularly useful tool for married couples who have children of their previous marriages, especially if including an interest in possession trust in their Wills.
Where couples are in this situation, by leaving an interest in possession to each other in their Wills in respect of their entire estates, the life interests given are still entitled to spouse exemption on the death of the first spouse or civil partner leaving the benefit of the transferable nil rate band intact.
In addition to the availability of the transferable nil rate band, the underlying assets of the interest in possession trust are preserved for the respective children of the previous marriages.
The main objective of this type of trust whether in a Will or set up during one’s lifetime, is to make a gift of income to one individual (known as the life tenant) whilst retaining control over the ultimate destination of the capital on the death of the life tenant.
If you are interested in providing for your family in this way, we recommend you talk to us. We are happy to provide you with further information and assistance.
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Update added 25th June 2009
6. THE ISSUE OF SURVIVORSHIP CLAUSES IN WILLS
May 2009
The ability to transfer nil rate bands between the estates of husband and wife or civil partners was introduced in the Finance Act 2008. It is more commonly referred to as "TNRB". The effect of the TNRB is that when the surviving spouse or civil partner dies, the nil rate band available at their death will be increased by the proportion of the nil rate band that was not used on the earlier death of the survivor's spouse or civil partner.
The nil rate band of the first to die may not have been used at all if the entire estate passed to the survivor. This is because any assets passing this way are entitled to spouse exemption and are therefore free of Inheritance Tax in any event. This leaves 100% unused nil rate band allowance which can be transferred to the survivor's estate. This facility is available regardless of whether the first spouse/civil partner leaves the survivor the entire estate outright or upon a life interest trust as both are currently entitled to spouse exemption.
It is worth noting that any gifts under your current Wills or lifetime gifts within seven years of death to non-exempt beneficiaries such as children, grandchildren, friends or other family members will use up a portion of the available nil rate band for transfer to the survivor's estate, so it is now more important to consider this issue in light of the recent changes to legislation.
THE SURVIVORSHIP CLAUSE:
In light of the new transferable nil rate band there are now potential Inheritance Tax implications for those who have survivorship clauses in their Wills. They commonly provide that a spouse or civil partner has to survive their deceased spouse or civil partner by a specified period of time such as 28 days or 30 days before the gift can take effect. It is now entirely questionable as to whether such clauses should continue to be included the Wills of civil partners or married couples.
There may be unequal ownership of assets between spouses or civil partners that could result in both spouses nil rate bands not being fully utilised which would in turn lead to unnecessary and sometimes significant Inheritance Tax having to be paid.
In very rare circumstances where a married couple or civil partners die in a common accident and it cannot be determined who died first, the law dictates that the eldest died first (known as the "Commorientes" rule). There are beneficial Inheritance Tax savings to be made in this unusual event providing there is no survivorship clause included in their Wills.
Prior to the introduction of the transferable nil rate band it was usual for Will drafters to include the usual 30 day survivorship clause in the Wills of married couples or civil partners. Now that the nil rate band allowance is transferable, if the survivorship clause remains intact it is possible that the allowance would not be transferable, in a situation of the second spouse or civil partner dying within the specified period, as the estate of the first to die would not go to the surviving spouse or civil partner, but rather, the children or other default beneficiaries.
As a result, the executors of the second spouse or civil partner to die would not be able to claim the transferable allowance, put simply, because the estate of the first spouse or civil partner to die has not passed to the (briefly) surviving spouse. This means that some estates could end up paying Inheritance Tax on the first death where otherwise they would not.
Example:
The nil rate band is £325,000 and the Wills contain a 30 day survivorship clause. Husband and wife die within 20 days of each other.
Wife has an estate in her own right of £200,000 and Husband has an estate in his own right of £400,000. Husband died first and because his estate does not pass free of Inheritance Tax (by virtue of the spouse exemption) to his wife (but rather passes to the default beneficiaries in his Will) because of the survivorship clause, his estate could end up paying some £30,000 in Inheritance Tax. However, without the 30 day survivorship clause, there would have been no Inheritance Tax to pay on his death because his estate would have passed to his wife free of tax due to the spouse exemption.
Supposing Wife dies first and because her estate does not pass free of Inheritance Tax to her Husband by virtue of the spouse exemption (but rather her default beneficiaries under her Will) because of the survivorship clause, although her estate is below the nil rate band threshold, and there will be no Inheritance Tax to pay, she would have effectively used up her nil rate band allowance to the extent of £200,000 and there would be a smaller transferable amount available for the survivor's estate. In some circumstances, the whole of the nil rate band may have been used on the first death in this way and there will therefore be no nil rate band transferable to the survivor's estate, resulting in a greater Inheritance Tax bill on the survivor's estate.
As can be clearly seen, without a survivorship clause, spouses and civil partners could benefit from a combined nil rate band on the death of the survivor in the region of £650,000.
Where survivorship clauses may still be relevant for reasons other than Inheritance Tax saving:-
Where a couple do not want the same substitutional beneficiaries in their Wills, if the other fails to survive: having a survivorship clause means that each spouse's estate will pass to their respective default beneficiaries (these could be a spouses' surviving children from a previous marriage). In the absence of such of clause the estate of the first to die would pass to the survivor and down to their own chosen default beneficiaries who may not be the same as that of the first to die.
We recommend that in light of the new changes and the potential Inheritance Tax implications, you review your Wills to ensure that they still meet your own specific needs and requirements and, where possible, ensure that Inheritance Tax savings are not lost.
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Update added 9th October 2007
5. TRANSFERABLE NIL RATE BAND BETWEEN MARRIED COUPLES AND CIVIL PARTNERS
In his Pre-Budget Report, the Chancellor of the Exchequer announced that from the 9th October 2007, it will be possible for spouses and civil partners to transfer their nil rate band allowances so that any part of the nil rate band that was not used when the first spouse or civil partner died can be transferred to the individual's surviving spouse or civil partner for use on their death.
To discuss implications: Contact us
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Please Note:
News Update 2008-2009:
The IHT allowance £300,000 (07/08), £312,000 (08/09) and £325,000 (09/10)
4. EFFECTS OF THE LEGISLATION
The IHT allowance has NOT been increased. Each individual is still entitled to a current nil rate band allowance of £312,000 (08/09) increasing to £325,000 per individual (09/10). The changes simply allow married couples or civil partners to use both of their nil rate band allowances on the second death. This has always been possible through effective will planning and so the Chancellor has given nothing away. The only people to gain from this is those who fail to plan.
How the new rules will work:
Example 1: (Based on rate 07/08)
J dies on the 27th May 2007 with an estate of £300,000. She leaves legacies in her Will of £40,000 to each of her three children with the remainder of the estate passing to her husband K. The nil rate band allowance on J's death is £300,000. K dies on the 15th September 2010 leaving his estate of £500,000 equally to his three children. The nil rate band when K dies is £325,000. J used up 40% of her nil rate band when she died because she had gifted a total of £120,000 to her children in the form of legacies under her Will, which means that 60% is available to transfer to K's estate on his death. K's nil rate band of £325,000 is increased by 60% to £520,000. As K's estate is only £500,000, there is no IHT to pay on K's death.
Example 2:
L dies on the 5th July 2007 with an estate of £300,000. She leaves everything to her husband M in her Will. However, two years prior to her death she made substantial lifetime gifts of £50,000 to each of her two children. These are failed gifts (PETs). L would have had to have survived a total of seven years for the gifts to fall outside of her estate for IHT purposes. The nil rate band allowance on L's death is £300,000. M dies on the 14th May 2010 leaving his estate of £600,000 equally between his two children. The nil rate band when M dies is £325,000. L used up 33.33% of her nil rate band when she died, which means only 66.67% is available to transfer to M on his death. M's nil rate band of £325,000 is increased by 66.67% (216,677.50) to £541,677.50. As M's estate is £600,000, there will be IHT to pay on the excess of £58,322.50 at 40%.
What does all of this mean for those who have made tax efficient wills in the form of nil rate band discretionary trusts?
Such clients do NOT need to re evaluate their Wills. It is not economical to incur additional costs to remove such trusts from their Wills, when, if appropriate, it can easily be reversed on the first death. The other important point is that it is highly likely that the rules will change again under a new government , making the inclusion of such a trust a valuable advantage.
My spouse died last year and a nil rate band discretionary trust arose in their Will?
If the trust has not been activated or the trustees have not exercised their discretion in favour of any one or more of the class of potential beneficiaries, including the execution of the loan arrangement in favour of the surviving spouse or civil partner, the trustees may appoint by deed, the entire trust fund in favour of the surviving spouse or civil partner absolutely within two years of the death of the first spouse but not within the three months immediately following the death. This has the effect of a reading back into the Will as if the first spouse to die had passed the entire estate outright to the survivor. Ending the trust in this way would mean that the nil rate band allowance was not used on the first death, and so the amount available for eventual transfer to the surviving spouse or civil partner would be increased accordingly, taking into account any legacies in the Will or lifetime gifts within seven years.
My spouse died three years ago and a nil rate band discretionary trust arose in their Will. The trustees exercised their discretion in favour of a loan of the entire trust fund to me as the surviving spouse. This has created a debt in my estate when I die in the event that I have not repaid it during my lifetime. Can this be easily reversed?
Unfortunately, in these circumstances, the nil rate band allowance has already been used on the first death. The trust must continue as previously intended.
I have heard that under the new rules I will not need to make a Will. Is this true?
The intestacy rules prevail when an individual dies without a Will. These rules state that when a married person with children dies, only a part of the estate passes to the survivor, that is, a statutory legacy of 125,000, all of the personal chattels and a life interest in half of the remaining estate, whilst the remaining estate passes outright to the children at age 18 years. The children are non-exempt beneficiaries and therefore it is likely that after spouse exemption applying to the legacy, chattels and the life interest, the nil rate band allowance will be used up partially or wholly on the part of the estate passing to the children.
The compulsory gifts under the intestacy laws not only deprive the surviving spouse of assets but also use up the nil rate band of the first to die. This reduces the uplift available on the survivor's nil rate band when they die which in turn results in more IHT being paid. Even simple Wills leaving everything to each other would ensure that the survivor has financial security and a potential 100% uplift of their nil rate band when they die.
HMRC have released details of the procedure for claiming unused nil rate band allowances and the process is far from simple. Claims of unused nil rate bands will not be automatic. To claim the unused nil rate band, such claim must be made by the personal representatives of the surviving spouse or civil partner when they die and not when the first spouse dies.
Clients should be aware that records and related papers should be kept indefinitely on the first death. The personal representatives of the first spouse must record the proportion of the nil rate band which goes unused. In most cases, it will be necessary to obtain a Grant of Probate on the first death.
To make a claim on the second death, the personal representatives will be required to complete an HMRC claim form which asks for information relating to the first spouse or civil partner to die. The form is sent to the HMRC for their consideration accompanied by requested documents such as death certificate, copy Will, marriage certificate or civil partnership registration, IHT200 or IHT205 and a schedule of assets and liabilities relating to the first spouse. The HMRC will either accept or reject the claim, depending upon the circumstances.
Estate planning is not always as simple as it seems.
Always seek professional help!
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3. Previous Newsletters(2006)
The Finance Bill (N0.2) 2006 has introduced changes to the application of Inheritance Tax to all Trusts.
The main purpose of the new changes was to treat all trusts (other than bare trusts) as discretionary trusts for Inheritance Tax purposes. Subject to certain exemptions (such as spouse exemption and trusts for disabled beneficiaries) all trusts will now be subject to the new discretionary trust regime.
The new regime creates a series of different choices for families that may make trusts unsuitable and families will now have the inconvenience of having to review their Wills where they have set trusts up for their children (or have left residue to minor children upon attaining a specified age).
Former government proposals meant that spouse exemption would no longer be available where a spouse was left a life interest under their deceased spouses' Will or on intestacy, however, the government has now returned to the pre-budget position for spouse exemptions. This reversion means that people in second marriages will still be able to use trusts in their Will to protect both their spouse and the children of their first marriage without incurring a tax charge. Muslim families will still be able to comply with Sharia Law.
The original trust taxation proposals created concern that children receiving capital at 18 years would encourage irresponsibility. However, the recent amendments now go some way to allaying such fears as families will now have three options available to them:-
- Give children capital outright at 18 years to avoid the ongoing 6% taxation regime (periodic charge arising on the 10 year anniversary of the trust).
- Leave children capital on fully flexible trusts with no certainty as to when they will receive capital (discretionary). The trust will enter the 6% tax regime on the death of the parent and remain within the regime until capital is paid to the child outright or
- Leave capital on trust to children with an age of attainment not exceeding 25 years. The trust will not become subject to the regime until the child attains the age of 18 years , however, in this situation the trust will not be subject to the 6% regime but rather a reduced charge of 4.2%. In some cases, in order to preserve the capital, families may well see this as a price worth paying.
- Leave capital on trust to children with an age of attainment exceeding 25 years (ie, 30 years). This will become subject to the regime at age 18 years and the trust would suffer the full charge of 6%.
Any exit charges imposed upon distribution of part or all of the trust fund (if trust fund is wound up entirely) will be proportionate to the periodic charge when funds are taken out between 10 year anniversaries. This means that the exit charge could be as little as 0.6% and as high as 6%.
Life policies written in trust after 22nd March 2006 will become subject to the new regime with a maximum tax charge of 6%. This is still preferable to a life policy becoming payable to a deceased's estate where the minimum charge will be 40%. All polices written in trust prior to 22nd March 2006 are not affected by the new regime.
Summary
In conclusion, it is important that the individual examines the provisions of their current Will, taking into account the various options now available for minor beneficiaries. Where you are not prepared to take on the new charges, it is wise to amend your Wills to vest capital in minor beneficiaries at an age not exceeding 18 years. Should you wish to amend your current Wills, please contact us to arrange for a revision of your Wills. In most cases this can be amended by way of a codicil to your current Wills.
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Previous Update June 2006
2. SUMMARY OF BUDGET NOTE 25
(AMENDMENTS TO TRUST TAXATION)
Legislation effective from 22 March 2006
Pre-amble:
The legislation attempts to bring the three main classes of trust arrangements ( i.e. Accumulation & Maintenance ("A&M") Life Interest or Interest in Possession ("IIP") and Discretionary into one class. That class is the Discretionary trust regime and with effect from 6 April 2008, all trusts will be taxed on the same basis.
The legislation effectively seeks to tax any assets held in trust with a value in excess of the Inheritance Tax ("IHT") exemption limit (currently £285,000) by imposing a ten year anniversary charge of 6% on the excess, a similar charge on any distribution of capital to a beneficiary during the trust term and again a similar charge on the winding up of the trust. There are only two types of trust exempt from this legislation - trusts for disabled and charitable trusts. Part of the legislation is retroactive and affects trust arrangements no matter when made. Furthermore, the legislation fixes the maximum age at which any child must inherit. That age is 18 years and any trust or Will which vests property over that age will need to be amended by 6 April 2008.
Life Assurance Policies
Any policy written in trust after 22 March 2006 will be subject to the new tax charges unless the beneficiaries inherit at 18 years. All existing policy trust arrangements will remain unchanged. This is a result of pressure on the government by the insurance industry.
Accumulation & Maintenance trusts
These were established in 1975 for the purpose of providing for educational and maintenance purposes of children under the age of 25 years. Commonly set up by grandparents or parents, there was no limit on the value which could be settled and the trustees had discretionary powers to retain assets beyond the age of 25 if they considered necessary. Under the new rules, there will be a 20% lifetime IHT charge on any assets passing into such a trust in excess of the IHT exemption limit. In addition the trust will be subject to the same 6% tax charges as explained above.
All current A&M trusts will need to be reviewed and amended before 6 April 2008 if these new charges are to be avoided.
Life Interest trusts or IIP trusts
This type of trust was more commonly set up by Will although many were set up as lifetime trusts. The purposes was to give a lifetime "income" benefit to a spouse ("the life tenant") or other class of beneficiary with the capital passing elsewhere on the death of that beneficiary. It was particularly common in Wills where the couple were on their second marriage and they wanted their respective assets to pass back to the children of the first marriage. This legislation seeks to impose the new tax charges on that lifetime interest and abolishes the spouse exemption. All current life interest trusts will need to be reviewed and all Wills containing a life interest will need to be re-written if these charges are to be avoided.
Wills generally
All current Wills will need to be reviewed particularly where the age of inheritance by minors exceeds 18 years and where any trust (except discretionary) arrangement is set up or where an interest in possession or life interest arises.
Trusts generally
What we now have is the basic discretionary trust rules applying. In summary, a 20% charge on the excess over the IHT exemption limit on funds passing into the trust, a 6% ten year tax charge, a 6% charges on capital distributions and a 6% charge on winding up the trust. The trust assets qualify for the full IHT exemption relief at each event date. A couple can still create a trust of £570,000 (currently) without any immediate tax charges. Given that the current rate of IHT is 40% discretionary trusts may still be an attractive means of minimising IHT.
N.B.
The Finance Bill 2006 is now in print. Royal Assent is not expected until July at which point it becomes law. There are a number of professional bodies such as STEP, the Institute of Taxation, accounting and other legal organisations who are currently in consultation with the government over the new legislation. At this time we expect there to be very few amendments to the legislation
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1. Previous Update February 2005
Gordon Brown has an enormous 'black hole' in his budget
and is determined to fill that hole by 'fair means or
foul' (not exactly his words!)
The dramatic rise in property values in the UK over the
last few years has increased personal wealth(on paper,
at least) whilst the various tax breaks available, have
not kept pace.
Numerous schemes have been designed, in the past, with a view to mitigating an individual's Inheritance Tax liability. As a result, people have been removing assets from their estates but continuing to enjoy all the benefits of ownership. Most of these schemes such as the "double trust" plan, Eversden type plans, Melville type plans, some "carve out" plans and the like, have over the last couple of years, had considerable press. As a result these schemes have not escaped the Chancellor's attention and consequently, he has introduced some draconian tax legislation, which captures a whole host of tax planning schemes, including some innocent transactions for which the legislation was not intended.
The Finance Act 2004 is now in place and the pre-owned assets charge which has resulted from this new Bill will apply to both tangible(land and chattels) and intangible(stock, shares and investments) assets, where the owner has given the asset away(to an individual or through a trust arrangement) but retains an interest in it or benefits from it.
Before we go into detail of this legislation, it is appropriate to remind ourselves that there is a major distinction between one's "residence" and one's "domicile".
Everyone obtains a place of domicile at birth. If you were born in the UK legally, you are UK domiciled, unless you have renounced that domicile by choice.
If you have relocated permanently to Spain, in order to renounce your UK domicile of origin you need to sever all ties with the UK. This means giving up your British passport, advising the Inland Revenue authorities, relinquishing club memberships, selling your burial plot etc. You would then be free to obtain Spanish domicile through the appropriate channels. Having Spanish "residencia" does not ordinarily mean you are Spanish domiciled.
It is difficult not to get too technical when attempting to explain this legislation, but in the main, it affects the Income tax, Inheritance tax and Stamp Duty position of anyone who may have entered into a tax saving arrangement.
The legislation potentially catches many UK resident taxpayers and those who are still domiciled in the UK, but are living abroad. Indeed, those who have not actively sought to avoid Inheritance Tax or Stamp Duty (now known as Stamp Duty Land Tax), despite the Government having targeted these issues in the new provisions, may still be caught.
Unwittingly, otherwise innocent transactions including equity release schemes, gift & loan arrangements, insurance bonds written in trust, joint ownerships (which have been created by gift) have now become entangled in this new tax web. There are other transactions which may be included in the new legislation; a Spanish property may have been purchased via a company structure and the company shares may be held by an offshore trust. However, if the original contributer of the purchase monies occupies the Spanish property and he is UK domiciled, he is deemed to have a reservation of benefit in the property and is therefore potentially subject to Inheritance Tax on the whole of the trust property unless he pays the pre-owned assets charge("The Regime") as described below.
The Regime(effective from 6th April 2005) has been made "retroactive" to arrangements as early as March 17th 1986, and, coupled with the Stamp Duty Land Tax("SDLT") effective from 1st December 2003, applies to land, chattels, stocks, shares and other investments where a gift of such asset has been made and where the doner of that gift retains a benefit whether by retaining occupation or by enjoyment of that gift. The Regime legislation is complex and its provisions are exhaustive. I will therefore, endeavour to briefly enlighten the reader on exactly how this legislation could affect the average UK taxpayer or non resident UK domicile.
Those who have entered into arrangements after March 17th 1986, which dispose of valuable assets, while retaining the ability to use them, are prime targets of the Regime. Various Inheritance Tax schemes have been executed since 1986 and the new legislation and has gone some way to discouraging them(but not necessarily abolishing them) by placing an extra cost on the taxpayer for the benefit of the saving which would be made in Inheritance Tax on death.
All trust arrangements where the original owner has retained a benefit(in relation to land chattels, stock and shares) will be liable to Inheritance Tax on their death unless they pay income tax on the rental value which is attributable to that property from 5th April 2005.
This is not by means of a physical payment of rent by the original owner but merely a determination of the taxable benefit to that owner. It is thought that where the taxpayer decides to pay the income tax charge in order to preserve his estate, he will be required to obtain annual rental valuations to ensure that the correct amount of income tax has been levied on the benefit he is receiving each year. The same principle applies to other types of investment assets, which have been wholly gifted or partly gifted(to an individual or trust) and the original owner reserves some kind of benefit to be taken up at a later date.
The alternative to the income tax charge, is to elect back into Inheritance Tax(available until January 2007, after which time no such election can be made), which would mean that the asset is treated as the owner's and taxed accordingly, on his death. This, of course, renders any previous arrangement in relation to that asset, ineffective.
Finally, if you have entered into any tax saving plan, particularly of the types described above, we recommend that you take appropriate professional advice, if only for the sake of peace of mind.
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