Accountant warns to act now on inheritance tax

Many people who have given away assets years ago to avoid the Inheritance Tax are unaware of a new charge being brought in from April 2005 and need to act now, warns accountants and business advisors, PKF.

A clampdown on Inheritance Tax loopholes, which have been exploited to drastically reduce liabilities on death, is proposed in Government legislation due to take effect next year.

While the legislation is primarily designed to have an impact on sophisticated and complex avoidance schemes, it could also hit straight forward arrangements entered into as far back as 17 March 1986 if individuals are still using or benefiting from property previously owned by them. PKF warns that anyone who has given away substantial assets since 1986 should take advice now on whether they are caught by the new rules.

Peter Harrup, tax partner at accountants and business advisors PKF, warned that a number of individuals whose wealth was tied up in the family home had found themselves potentially liable for Inheritance Tax (IHT). Peter Harrup said: "This is primarily because of rising house prices and, as a consequence, many individuals caught in these circumstances have entered into a variety of avoidance schemes."

"These schemes enabled people to get around the IHT anti-avoidance legislation (known as the Gift with Reservation of Benefit rules) by transferring the ownership of the family home but still occupying the property, either free of charge or at a below market rent.

"Instead of remedying the flaws in the current IHT legislation as you might expect the Government is seeking to impose an annual income tax charge from 6 April 2005."

There are, said Peter Harrup, a number of proposed exemptions to the new rules and people could also, in theory, 'unscramble' arrangements before next April so they were not caught by the new income tax charge. Alternatively, there will be a window of time for people to decide whether to live with an annual income tax charge or to elect for the asset to be treated as still in their estate for IHT purposes. Whether or not to make the election will be a difficult decision.

"In my view there are a number of problem areas and issues with this legislation. Not least of these is that many who gave assets away years ago may not be aware of the charge from April 2005, or have the cash to pay an income tax charge on an asset they have given away."

The proposed legislation also introduced yet more complexities as the onus is on taxpayers to make the correct disclosures on their self-assessment returns and this would involve valuing any benefits subject to the new charge. Failure to make correct disclosures could lead to penalties being incurred.

"Anyone who has given away substantial assets since 1986 should take advice now on whether they are caught by the new rules so that they can consider the options available to them."