denotes premium content | Jan 6 2009 Feature
posted 12 Jun 2002 in Volume 7 Issue 4
Implications of the finance bill
The Finance Bill has introduced fewer changes than were anticipated by some practitioners but nevertheless a number of important amendments have been made to existing legislation. Emma Chamberlain, a barrister at 5 Sone Buildings, assesses the main changes that could affect private clients.
The Finance Bill has introduced fewer changes than were anticipated by some practitioners but nevertheless a number of important amendments have been made to existing legislation. The main changes which could affect private clients are summarised very briefly as follows. More detailed analysis will be made in a future edition:
Inheritance tax
1. The nil rate band is now increased to £250,000 with effect from 6 April 2002.
2. For deeds of variation made on or after 1st August 2002 it will no longer be necessary or indeed possible to make an election for capital gains tax and inheritance tax purposes under section 142 IHTA 1984 and section 62 TCGA 1992. (No election is possible anyway in the case of disclaimers.) Deeds of variation will not be sent to the Revenue unless extra tax is payable.
Instead, if it is intended that the variation should take effect as if it had been made by the deceased, then this must be stated in the deed of variation. The change is the same in relation to both capital gains tax and inheritance tax.
It will still be possible to have a different statement for capital gains tax purposes and inheritance tax purposes (so that reading back applies for one tax but not another). However, one will no longer be able to wait and decide whether or not to make an election.
Under the current regime one could wait for up to six months after execution of the deed of variation before deciding whether to make an election for capital gains tax or inheritance tax purposes. This will no longer be possible since the statement must be in the deed of variation when executed.
3. Code of Practice. The decision also has other implications. Those drafting Deeds of Variation will not after August have to submit them to the Revenue unless any additional tax is payable. Often no additional tax will be payable because the purpose of the variation will simply be to use the nil rate band of the Deceased.
The difficulty is that if there are any errors in the deed of variation these may not come to light for some years. The purpose of the change has been to reduce compliance costs for the Revenue since they will no longer have to examine all deeds of variation. However, it increases the burden on solicitors to get the variation right since deeds will generally not be examined by the Revenue for many years. Thus the draftsman must ensure that the relevant beneficiary giving up their interest has capacity to do so (particularly important in relation to trust interests) and that the deed of variation is properly effected. A life tenant cannot give up more than his or her life interest. The remaindermen may have only contingent interests. They cannot easily enter into a deed of variation.
Common problems arise when for example the nil rate band clause taking effect in a variation is incorrectly drafted or specific gifts in the deed are expressed to be free of tax instead of subject to tax. On occasion it has been possible to obtain rectification of deeds of variation which were wrongly drafted if the evidential burden for rectification could be satisfied. Rectification will be much more difficult if problems only come to light many years later. It has therefore been suggested that a code of practice should be drawn up by STEP and agreed with the Revenue to assist practitioners in this area and to provide a checklist of danger areas to look out for.
4. Melville
The Finance Bill contains a measure to reverse the effect of a recent decision of the Court of Appeal in Inland Revenue Commissioners v Melville [2001] STC 1271. The clause provides that “settlement powers” over trust property will be disregarded for inheritance tax purposes. A “settlement power” includes a power to revoke the trusts or direct the trustees to appoint the trust assets to anyone.
The change will be deemed always to have had effect as regards the tax charge on death but otherwise it will apply as from 17th April 2002. However the change does not apply where powers have been acquired for money or money’s worth.
If someone has released a power by lifetime gift before the Budget they will have made a transfer of value which may or may not be chargeable. However, anyone holding a “settlement power” will find that the settlement power no longer has no value unless it was purchased. This is particularly helpful for excluded property settlements.
It appears possible to do a variant on Melville such that someone who wishes to settle assets exceeding the nil rate band into discretionary trust and claim holdover relief can still do so without triggering an immediate inheritance tax charge. However, the clause in the Finance Bill reverses some of the more odd results produced by the Melville decision in terms of double inheritance tax charges. Perhaps surprisingly there are no changes to holdover relief and thus it is still possible to claim holdover relief for capital gains tax purposes on gifts into discretionary trusts.
5. Excluded property settlements. It was also widely rumoured that there would be changes to the gift with reservation rules on excluded property settlements but although Capital Taxes seem to be looking at this area currently they have not actually changed their practice despite certain changes in the Manual. It is anticipated that if there are any changes these will be announced as part of the document reviewing domicile and residence generally.
6. Other schemes. It is surprising that certain more aggressive tax planning such as the home loan scheme and the implications of Essex (a 2001 Special Commissioners case which is being appealed) have not been reversed. In Essex it was held that if property is put into a life interest trust for a spouse the reservation of benefit provisions will not apply even if the life interest is later terminated and the property is then held under trust where the original settlor can benefit. This case is currently under appeal. However, it potentially could be of great assistance to people wishing to do tax planning with the family home.
Capital gains tax
Changes in this area have been more extensive.
- Personal losses There is now a helpful clause in the Finance Bill whereby personal capital losses can be set against trust gains. The basic position is that settlors who retain an interest in a trust whether UK resident or not are generally taxed on the gains of those trusts. Such gains could not be set against the settlor’s personal losses.
However, trust gains arising after 5th April 2003 which are attributed to the settlor will be calculated before the application of any taper relief but after the deduction of trust losses. The settlor can then set these attributed gains against any personal losses which he has been unable to utilise against his personal gains. If any attributed gains remain in charge they will be reduced by taper relief which the trustees would have otherwise claimed.
The settlor may elect for these rules to apply to gains which arose between 6th April 2000 and 5th April 2003 but the deadline for the election is 31st January 2005 in all cases. There are certain issues about the election which may be problematic but in general terms the relief is very helpful.
7. Business assets taper relief. The changes to business assets taper relief have been confirmed. Therefore business assets taper relief will be available to reduce the rate of tax for a higher rate taxpayer on business assets to 20% if owned for 1 year and 10% if owned for 2 years. However, bear in mind that the odd apportionment rules will still apply if someone owned an asset which was not a business asset for any part of the period of ownership since 1998. The problem arises particularly in relation to shareholdings which may not have been qualifying business assets prior to 5th April 2000 but when the rules changed did qualify as a business asset. It often means that someone who has owned shares for only two years may well be in a better capital gains tax position than someone who has owned shares for say three or four years.
8. The rules governing what qualifies as a business asset remain complex although the definition of a trading company has been clarified in further legislation so that the purpose test is now abandoned and the legislation looks more at the activities carried out by the company.
9. Certain other difficulties in the taper relief legislation – for example the anti-avoidance provisions applying where close companies change their activities and problems arising from earnout and debts on a security have also been dealt with.
Stamp Duty
1. A consultative process is going to take place on stamp duty but for the moment resting in contracts is still largely possible. Resting in contracts involves the vendor exchanging contracts with the purchaser for the sale of the beneficial interest but formal completion by way of transfer does not actually take place for some years. This option is still available provided the consideration is less than £10 million.
2. There is a tightening of the penalty regime on stamp duty and therefore instruments executed offshore can no longer avoid penalties until such time as they are brought onshore.
Other
There have been some useful extra reliefs on charitable giving – in particular on gifts of real property to charities where a tax deduction will be available.
It is also worth noting that there has been an important decision at the Special Commissioner level regarding the changes in the inheritance tax penalty regime which were introduced in Finance Act 1999. The recent case of Robertson was found in favour of the taxpayer; he submitted estimated valuations but then revised valuations on some land, paying the tax in any event within six months of death. He successfully resisted the Revenue’s attempts to impose a penalty.
The case makes important reading for anyone who has a dispute with the Revenue on inheritance tax penalties.
Emma Chamberlain is a barrister at 5 Stone Buildings, Lincoln's Inn and specialises in tax and trust work. She can be contacted on 020 7242 6201 or by e-mail at emma@jmchamberlain.freeserve.co.uk.
