Final Nail In The Coffin For Inheritance Tax Trusts?

by Jason Gorringe, Tax-News.com, London

16 December 2003

The UK's inheritance tax trusts appear to have been dealt a fatal blow by the Inland Revenue, who are planning to impose income tax on individuals who are deriving a benefit from an asset they have given away.

So-called ‘home-loan schemes’ help taxpayers to circumvent the Revenue’s ‘gifts with reservation’ rules and avoid the inheritance tax net by allowing them to sell their house to a trust in return for an IOU. This IOU is then passed on to the heirs of the house via another trust whilst the taxpayer continues to dwell there.

According to the Financial Times, Paul Knox, tax director at Ernst & Young, said: "It is very unexpected to use income tax to solve an inheritance tax problem. In future, middle Englanders will have to think carefully about aggressive tax planning."

With many homeowners finding themselves with property valued way above the inheritance tax threshold of £255,000 thanks to the house price boom, the FT claims that up to 20,000 taxpayers could be affected by the proposals.

Those who have taken out such schemes will have until April 2005 to dissolve them, after which the Revenue will tax individuals based on the estimated benefit of continued occupancy of the house.

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