Private Client UPDATE

Issue No.1 October 2004

This is the first of an occasional newsletter we propose sending to our private clients. Topics we will cover will include tax planning, wills and trusts, powers of attorney, and issues relating to your home. We are confident that you will find these newsletters of interest. If at any stage you prefer not to receive them, please see the unsubscribe option at the bottom of each letter.

Chancellor’s attack on IHT Planning – Pre-Owned Assets

The Chancellor has recently effectively closed a number of lifetime tax planning schemes. He has created an income tax charge, which will bite if a person has disposed of an asset and continues to occupy or use it, but has managed both to avoid payment of inheritance tax and the “gift with reservation” rules. The new tax is retroactive to transactions entered into since 17th March 1986 and will be payable after 6th April 2005 - the so-called “Pre-Owned Assets Charge” (“POAC”).

Have you effected any of the schemes likely to be caught? These include the “Ingram” scheme, the “Eversden” scheme (new ones had already been blocked by the Chancellor), the double trust/loan schemes, certain gift and rent back arrangements where no market rent has been paid and also certain cash gifts.

If you have, and your arrangements are caught, the amount of income tax charged will depend on the type of asset. Different rules apply for land, chattels and other assets such as shares where the person making the gift retains an interest. The rules for calculating the tax are very complex.

There are limited exceptions to the charge.

If you have entered into any of the above schemes we will be pleased to consider with you:

• Whether any of the exemptions may apply.
• Whether you should “opt in” to the “gift with reservation” rules. You only have until 31 January 2007 to do so. By doing this, IHT will be payable on your death but you will avoid the POAC.
• Is it possible to “unscramble” the original transaction? This will not be possible if the beneficiaries of the original gift include children under 18 as they will be unable to consent.

Tax Planning – The Way Forward

As explained above lifetime tax planning options are now much more limited. However, there are still some tax planning measures that can effectively reduce the amount of IHT payable on your death. We will be pleased to discuss with you:

• Equalising assets between husband and wife.
• Making maximum use of the annual exemption, other permitted gifts and normal expenditure out of income.
• Certain property sharing arrangements where the donee also occupies the property.
• Making potentially exempt transfers.
• Acquiring assets which become exempt from IHT under present rules.

In particular if you have not done so recently we would recommend that you review your will. Depending on your individual circumstances useful measures that you could consider include:

• Spouses owning their residence as “tenants in common” rather than as “joint tenants”. Your specified share can then be left under your will, making use of the nil rate band, rather than passing automatically to the surviving joint owner. However there are a number of downsides to owning as tenants in common so this step needs to be carefully considered.
• Making gifts of up to the nil rate band (currently £263,000) to someone other than your spouse.
• Creating discretionary nil rate band trusts. At the moment these are still accepted by the Inland Revenue.
• Maximising business and/or agricultural property relief.
• Giving a terminable life interest to your surviving spouse.

The benefits of any tax saving measures will need to be weighed against any other effects of the various measures but there is still plenty to think about if you wish to reduce your liability to pay IHT on your death.

Note:

Please note that this newsletter is not intended to be a comprehensive statement of the law and should be used for guidance purposes only. If you require specific legal advice please contact Nick van der Borgh or Sharon Rutter or by telephone 020 7493 2903.