Confusion Surrounds Application Of New Inheritance Tax Proposals

by Jason Gorringe, Tax-News.com, London

27 May 2004

In what has been dubbed a major government blunder by MPs, it has emerged that the UK’s crackdown on inheritance tax planning may have resulted in a new double taxation threat.

The controversy has arisen from debates on the Finance Bill in committee, where certain members have warned that the dissolving of trust arrangements to avoid the new income tax charge on house occupancy may leave beneficiaries facing a significant capital gains tax bill in addition to death duties.

This is because the capital gains calculation will apparently be based on the value of properties at the time of original settlement rather than the time of death.

“It would be monstrously unjust for inheritance tax to be on market value on death and for market value on death not to be the carry forward cost for capital gains tax purposes,” the shadow Chief Secretary to the Treasury, Howard Flight, told the committee.

He was joined in his protest by the Liberal Democrat member John Burnett who observed: “This looks like a blunder.”

“If someone opts to pay the full value for inheritance tax purposes at death, they should always receive an uplift for capital gains tax purposes,” Burnett added.

Whilst government minister Dawn Primarolo has pledged to write to MPs clarifying the confusion, she disagreed with Flight’s interpretation of the proposals, accusing him of attempting to “re-write the capital gains tax rules in a way that they do not currently apply to that regime.”

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