News from the Residential Property Investor, the bi-monthly magazine for RLA members other artilces from the November / December 2002 issue RPI news archive

Inheritance tax clamp down - November / December 2002

Thousands of rich couples who have recently set up inheritance tax avoidance schemes could fall foul of a crackdown by the Inland Revenue.

Stung by the defeat of its legal attempts to close down one type of IHT avoidance scheme, the Inland Revenue has decided to introduce laws forbidding their creation.

A leading tax consultant has warned that the amending legislation may be introduced in November or in the next Budget. In practical terms this would render recently established schemes invalid.

These concern complex two-stage schemes which enable married couples to hand their house onto their children and avoid IHT, charged at the top rate of 40 per cent on assets over £250,000.

'Although the Revenue does not usually introduce legislation that closes loopholes retrospectively, it could amend the legislation with the effect of changing it retrospectively depending on whether it wins its next appeal', said Peter Legg, director of estate planning at WJB Chiltern who used to work as a taxman.

'The Government has a shortfall in its tax revenues, which will be made worse if there is a war in Iraq. Closing IHT loopholes is an obvious way of increasing revenue'.

Under these schemes, a house is first transferred to a tax-free trust in control of one spouse. When they die the house is transferred to a discretionary trust, also tax-free, which allows the survivor to live in the house without paying IHT.

This loophole received great publicity in July when the Inland Revenue lost its appeal in what is known as the Eversden case.

In this case, a Mrs Greenstock transferred 95 per cent of her matrimonial home into a trust. On the death of Mr Greenstock, the house passed on to a discretionary trust, from which Mrs Greenstock was a possible beneficiary. She continued to live in the home even though it had 'left her estate'.

The Revenue lost its argument that on the death of Mrs Greenstock the house was still part of her estate and therefore subject to IHT. The scheme only works if the parent setting up the trust lives for seven years after establishing the scheme.

The danger for married couples who have set up such trusts is that the Revenue may amend legislation to declare that gifts, such as houses, cannot be left by parents to their children while continuing to benefit from living there and avoiding IHT.

IHT, which is known as the 'death tax', raises about £3,000m a year for the Treasury.
 

other artilces from the November / December 2002 issue

• Making representations
• Tenancy gains for unmarried couples
• Queen's speech
• In brief
• Inheritance tax clamp down
• House price inflation lower
• Housing benefit pilots
• Household debt management