Elderly Client Adviser archive

Volume 9 Issue 3

The Budget 2004

Harold Wilson once said: “Whichever party is in office, the Treasury is in power.” If this is the case, then Gordon Brown may perhaps be more reluctant to become prime minister than rumour has it. He also has less grey hairs nowadays than his formerly more sprightly colleague at Number 10.

For ECA readers’ older clients, £100 for council tax purposes is pretty much all that was on offer in the 17 March Budget. That issue is set to continue running, even if a new local income tax is introduced (see Harvey Cole’s article in this edition).

But, for those involved in trusts and tax for the private individual, it must rate as the most important Budget for quite some years. Changes and signposts for the future abound.

The regrettably retrospective pre-owned assets rules are set to bite from 6 April 2005. They are more limited than feared but tax planning has become a lottery as a result and new complex ‘schemes’ will have to be looked over by the tax office first as a matter of law, although how and when is a mystery... More generally, my editorial space this issue summarises the most important points with a few practical notes.

Capital gains tax. Tax year 2004-5

The annual exempt amount is increased from £7,900 to £8,200 so the trustees allowance for non-settlor interested trusts is rising from £3,950 to £4,100. This unexciting inflation up-rating is simply consistent with past policy.

Stamp duty land tax (SDLT)

The SDLT thresholds and rates are unchanged with the starting point for residential property being just £60,000. That is the cost of a large cupboard in London, a very nice pair of luxury caravans in North Wales, a top-of-the-range Jaguar car just about anywhere, but rarely (letters on a postcard) a good-sized family home.

SDLT is proving a rather good source of revenue. The current percentage level of basic rate of tax is sacred but government borrowing is soaring and house prices are still on the up. As a result, readers should not expect any great changes in the thresholds for a very long time.

Income tax: The biggest rat yet

The rate applicable to trusts ‘RAT’ (broadly relevant to income and gains on trusts where trustees can accumulate income and to gains on deceased estates in administration) was confirmed as increasing on 6 April 2004 to 40 per cent from 34 per cent. The corresponding dividend trust rate rises to 32.5 per cent from 25 per cent.

In my opinion, this increase amounts to a significant stealth tax with an 18 per cent or 30 per cent increase in rates depending upon the income source. Essentially it penalises inherited wealth.

The increase may mean that trustees have to consider payments to beneficiaries for tax reasons if the beneficiaries might make use of the tax credit that an income distribution would bring them. In some cases, that could create problems for financially fickle or more vulnerable beneficiaries. The possible impact of extra income distributions from trusts upon any means-tested benefits entitlements of beneficiaries should also be carefully assessed.

More news on modernising the tax system for trusts

This set of alterations follows the pre-budget consultation paper on the subject. It ties in with the RAT changes. The changes will apply from 6 April 2005, but will be backdated to 6 April 2004 for trusts for the vulnerable (whoever they are eventually agreed to be):

There will be a basic rate for the first £500 of income for all trusts liable to the RAT. Smaller trusts, which we are told number 30,000, generating only a little income already taxed at basic rate prior to receipt will have no extra income tax to pay. Gross income receipts beneath this threshold will not be subject to the ‘normal’ higher RAT. I would suggest that although the Inland Revenue is set to lose thousands of staff in cutbacks, this will cost but few jobs;
Certain trusts for the disabled and orphans (and possibly other vulnerable persons) will be taxed on the basis of the vulnerable person’s individual income and capital gains tax position. On a cursory reading, it appears that this will practically eliminate the importance of the trust tax return in these cases and transfer the responsibility to the beneficiary’s personal tax return. This may create some added complexity if there are multiple potential beneficiaries of a trust. It may be necessary to actually pay over the income to benefit from the new regime and this might affect means-tested benefits entitlements and create other wider problems if a vulnerable person is suddenly more flush with cash. If it does not require actual distributions, then it may still be hard to administer. We shall have to see how the details appear in the Finance Bill.

More ‘modernisation’ can be expected from the government on trusts in the run up to the next election.

Inheritance tax, probates and penalties

The increase in inheritance tax thresholds from £255,000 to £263,000 is welcome but it only amounts to a three-per-cent increase while house-price inflation is still at 18 per cent in some regions. Increasing numbers of people with modest means are being caught simply by owning their home.

This slight, and surely innocent, oversight seems to indicate an increasing role for inheritance tax.

The following changes will take effect from the Royal Assent to the Finance Act 2004:

One aim is to bring 30,000 estates a year within the simpler reporting regime for inheritance tax so that an inheritance tax account will only be needed where there is a tax liability. In other cases, contact with the Probate Service will cover both tax and probate formalities. The same penalties will apply to delivery of incorrect information whether or not contact is with the Probate Service or Capital Taxes Office. The relevant regulations will be decided upon after consultation. STEP committee members may be up all night again;
An inheritance tax penalty provision, which can generate a fine of up to £3,000 will be implemented for failure to submit an inheritance tax account or to notify the tax office if a disposition on death is varied. But the penalty charge, where no additional inheritance tax arises as a result of negligent or fraudulent information being submitted to the tax office, will be dropped. There will be a fixed penalty of only £100 for late delivery of an inheritance tax account unless the tax involved is under £100 or there is a ‘reasonable excuse’. The word ‘reasonable’ is music to the ears of all lawyers.

Tax treatment of pre-owned assets

The relevant budget bulletin suggests that: “People who have entered contrived arrangements to dispose of valuable assets, while retaining the ability to use them,” will be hit by an income tax charge from 6 April 2005. This is a very odd way to protect inheritance tax revenues and was attacked as such by many professional bodies, as well as the ECA submission to the Inland Revenue compiled from readers’ views. The ECA response is still available on the website. The budget bulletin advises:

The income tax charge will apply from 6 April 2005 to the benefit people get by having free or low-cost enjoyment of assets they formerly owned or provided funds to buy. The model for the charge is that of ‘benefits in kind’ charged on employees. The rules will set an annual cash value for the benefits enjoyed, which will be taxable. It is still rather unclear how this will fit in with the inheritance tax rules allowing a person to pay a full market rent, for example, for a family home gifted to children or for occasional access to a trust holiday let potentially avoiding inheritance tax on death. It is supposed that such situations will not be adversely affected their not being part of ‘schemes’;
The government’s newly clarified aim is to attack “artificial structures to avoid the existing rules about gifts with reservation”. The income tax charge is justified as it reflects “their additional taxable capacity from receiving these benefits at low or no cost”. This is submitted to be peculiar logic. If an asset when it is owned is not taxed, for example, the family home, is there anything radically different when exactly the same manner of occupation arises under some other arrangement? It does not mean there is either any more benefit or resources available to justify a tax charge. It is just a sign of the Inland Revenue’s renewed anti-avoidance offensive. It has no innate logic other than that.

The alarmingly limited exclusions from the rule originally suggested in the pre-Budget consultation document are to be extended. It appeared from the pre-Budget consultation document that many innocent transactions, such as settlor-interested trusts of the family home without a tax-planning motive would be taxed. This does not now, mercifully for vulnerable older and disabled people, appear to be the case. This is the direct result of pressure from the professional bodies and other groups such as ECA readers. It was, therefore, well worth all our efforts. As they stood, the proposed rules would have been both unfair and impossible to enforce and a recipe for resentment and indeed evasion. Now the main difficulty will be for the draftsman to decide how to frame a whole raft of exclusions without creating yet more loopholes… In brief, the additional exclusions mean that:

Property gifted before 18 March 1986 will be irrelevant;
Property formerly owned by a taxpayer but now owned by their spouse will not be caught;
Assets caught under the gifts with a reservation of benefit rules will be irrelevant as the aim is to protect inheritance tax revenues. This means that trusts where a settlor retains a benefit as a beneficiary or potential beneficiary will not be caught. Transfers of property where simple occupation or a similar benefit is retained as a matter of fact (whether or not under some paperwork or other) will also not be caught unless an artificial scheme is involved;
Assets sold at an arm’s length price (including to family members) but, for example, still lived in, will not be caught;
Assets transferred under a deed of variation will not be caught;
Incidental benefit and benefit as a result of a change of circumstances of once gifted assets will not trigger a charge.

If formerly effective inheritance tax planning schemes cannot be dismantled prior to 6 April, then taxpayers involved may ‘opt in’ to the gift with a reservation rules they ‘opted out’ of by entering the scheme. This ‘revolving door election’ as I would term it will be available until 31 January 2007. Should there be a change of government before then taking the position to the one prior to 6 April 2005, I wonder if the door will turn again?

The ‘substantial de minimis’ threshold below which the cash value of benefits in a given year is ignored is set at £2,500 a year. I feel this is more de minimis than substantial. It suggests that relatively modest arrangements may be caught in the ‘right’ circumstances whatever they turn out to be…

Valuation principles are yet to be finalised and the Revenue are soliciting more responses on this subject. I imagine it will be more work for surveyors. Set up those new MDPs with them now to cash in.

Readers will be kept informed of how the important changes flagged up will be effected by articles in subsequent editions. Don’t forget ECA welcomes feedback and constructive comments on style and content.

Features

Key update: Stamp duty land tax and stamp duty Free
Stamp duties are a dull, complex subject and are therefore the most easily overlooked taxes from the perspectives of both clients and professional advisers. They are sometimes only addressed when it is too late either in terms of their cost or procedural requirements. This creates an avoidable but significant risk for the adviser and the unnecessary loss of valuable fees for giving appropriate advice. This article by David Coldrick addresses stamp duty land tax (SDLT) and stamp duty from the vantage point of the adviser primarily interested in trusts and estates.

Case feature: The important case of Malcolm Pointon Free
Many readers will be aware, through recent press coverage, of the successful outcome of a complaint made to the Health Service Ombudsman by Barbara Pointon, concerning the care of her husband Malcolm. In 1999 Barbara and Malcolm were the subject of an acclaimed television documentary called ‘Malcolm and Barbara – a love story’, which followed the couple for four years as they coped with Malcolm’s Alzheimer’s disease. Caroline Bielanska describes what happened next as Barbara repeatedly encountered and overcame obstacles for getting help. The complaint raises once again, the issue of respite for carers, flaws in the assessment process and of continuing NHS healthcare in one’s own home.

Parnall v Hurst: A cautionary tale Free
Barrister Sidney Ross examines the conduct of an inheritance-act claim in reference to the Parnall v Hurst case. While revealing how difficult it is to eliminate a case that has merit because of procedural irregularity, the case demonstrates how legal advisers may nonetheless find themselves in trouble over costs.

Part five: Protecting the interests of older people Free
David Coldrick continues the ECA course on protecting the interests of older people, this time examining the issue of complexity and cost in the context of a deceased’s estate with a will trust. It is updated to include the March 2004 Budget and the ‘Jemma trust’ case on solicitors’ fees for probate services.

Council tax: Not just a problem for older people Free
Council tax is under mounting attack as a method of raising finance for local government services, particularly in the context of older people being unable, even unwilling, to meet increases well above the rate of inflation. So what is likely to happen assuming the government is made increasingly uncomfortable by older people being prepared to go to prison rather than pay? Harvey Cole, ECA’s new economic and development correspondent, examines the situation and prospects for change.

Part five: The basics of financial planning Free
In this part, Michael Hague finds potential problems with some ‘offset mortgages’, the limits of the Financial Services Compensation Scheme on deposits and the troublesome little word ‘unless’ . We also make the acquaintance of the keen money methods of the ‘rate tarts’ and matters bearing on an efficient mixture of assets, timing entry into the market, tax efficiency, monitoring and reviewing. All these will be of interest to the reader both personally and professionally, especially in the context of the Trustee Act 2000 duty of care and the requirement to consider diversification.

The Mental Incapacity Bill: Latest instalments Free
In the January/February issue of ECA, Martin Terrell, a partner at Rix & Kay, examined the implications of the draft Mental Incapacity Bill, its controversies and potential pitfalls, and its implications for decision making in personal welfare and healthcare matters. In this follow-up article, he assesses the latest developments and whether we have yet made any real progress.

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Case digest Free
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