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Latest update for taxpayers on Government's war on tax-avoidance

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The Chancellor's latest campaign in his war on tax avoidance will affect more taxpayers than ever before as the Finance Bill extends the battlefield to include the tax treatment of trusts and a number of so-called 'reforms' to corporation tax including the abolition of the nil rate on the first £10,000 of income.

PKF's latest edition of 'Current tax developments' summarises the main changes to tax legislation and explains how they will affect both business and personal tax payers. The 40 page booklet is available to download from the PKF website.

The main area of change to affect many families is that of trusts which are used by many as a practical device to protect income and assets and when drafting wills. Many new trusts will now be subject to Inheritance Tax (IHT) at a rate of 20% for all lifetime transfers into the trust; an IHT charge will be levied at a rate of 6% every ten years on the value of the trust above the IHT threshold; and an exit charge may also be payable when the assets leave the trust. These changes mean that many taxpayers should now revisit their wills and any other form of estate planning to review whether current trust arrangements should be changed.

The only encouraging news for investors is the introduction of real estate investment trusts (REITs) which will create tax- transparent vehicles for investment in rental property. Already, four of the largest property companies, Hammerson, Liberty International, Land Securities and British Land have announced that they will convert to REITs when the legislation is brought in next year.

Peter Penneycard, National Director of Tax at PKF, said: "This year's Finance Bill will have a major impact on the majority of taxpayers – most of whom will not thank the Chancellor for his determination to avoid a straightforward rise in tax rates only to rake in more tax revenue through complex stealth taxes."

"While it is entirely appropriate that the Government clamps down on fraudulent activities such as carousel fraud, it may be counter-productive in the long term to take the same draconian attitude towards bona fide business transactions structured honestly to optimise the taxpayer's position. There is a huge gap between fraud and tax planning but the Government's attitude is that they are merely different sides of the same coin."

Posted June 22, 2006

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