Tag Archives: avoidance
Tony Wickenden: The Govt Moves To Target IHT Avoidance
12 September 2013 As I have said on more than one occasion in my writing about the general anti-abuse rule, the GAAR does not spell an end to targeted anti-avoidance rules. And this year’s Finance Act proves the point in relation to inheritance tax. In its 2013 Budget, the Government announced new provisions aimed at neutralising some of the inheritance tax advantages that can apply in connection with loans taken by the deceased which remain outstanding on their death. In this regard, the Government announced that these new provisions would prevent a loan being deducted from a person’s taxable estate before calculating inheritance tax when either: – The loan was used to acquire, maintain or enhance property qualifying for business property relief, agricultural property relief or woodlands relief – The loan was used to acquire, maintain or enhance excluded property, (ie usually, but not exclusively, non-UK situs property owned, usually, by non-domiciliaries that is, as a result, exempt from IHT) – The loan was not repaid on death and there was no good commercial reason for this. The original proposals applied to all deaths or other chargeable events arising after the Finance Bill 2013 receives royal assent – which it did on 17 July. Originally, there was no condition in relation to the date that the loan was taken. This meant that even loans taken out (without time limit) before the new restrictions were announced would be swept up by this provision. Okay, perhaps not retrospective strictly speaking but very much retroactive. In relation to BPR, APR and woodlands-relievable property, it is understood that this measure is primarily aimed at arrangements that (at least in the eyes of HMRC) aim to give an individual a “double deduction” by securing a loan on, say, residential property thus securing a deduction on death, yet enabling the borrower to invest in assets that are relieved from inherit-ance tax,for example, Aim shares which qualify for 100 per cent business property relief. The legislation does not discriminate in relation to intent and so could easily catch innocent commercial transactions. For example, individuals seeking to invest and work in a trading business or to purchase agricultural property to farm may take a loan on the security of their principal private residence or other personal assets. Such an arrangement would primarily (mostly exclusively) be commercially motivated and tax would not be any kind of determinant. As a result, a number of professional bodies raised concerns that the legislation as intended was unfair. Some pretty coherent arguments were advanced as to why the provisions, as drafted, were misconceived. Similarly well argued comments were made in relation to the non-relievable nature of loans taken to acquire, enhance or maintain excluded property. The Government has listened to these representations and decided that (in relation to the acquisition, enhancement or maintenance of property that qualifies for BPR, APR or woodlands relief) only loans entered after 5 April 2013 will be affected by these new provisions. So it has listened but only introduced a small relaxation in relation to the time the loan was taken. There has been no general relaxation by reference to intention which was what was hoped for. Would it have been that difficult, for example, to exclude from the non-deductibility rules any loans taken to invest in businesses or farms by individuals who work full-time in the enterprise that receives the benefit of the funds borrowed – subject to suitable safeguards? Apparently it is (too difficult) and so advisers to business owners and farmers must be aware of this when calculating the potential IHT liability of these individuals. One unintended consequence of these provisions is likely to be an increase in the IHT liability of some business owners and farmers. Not by reference to any direct reduction of BPR or APR or woodlands relief but the increase in the IHT value of non-relievable assets which would have otherwise been reduced by a deductible debt. Of course, this may also be the case for some non-UK domiciliaries. The former category, of course, represents, for most advisers, a greater and more accessible client segment. For those of the right age and in good health the role of life assurance in trust (usually on a last survivor basis) for married couples (given the spouse exemption and transferable nil rate band), as a means of providing for the liability without changing their life, should not be overlooked. Tony Wickenden is joint managing director of Technical Connection Continue reading
Life’s Too Short To Bother With IHT Avoidance
http://www.ft.com/cms/s/0/63b73472-d36d-11e2-b3ff-00144feab7de.html#ixzz2X2FlNRb4 By Jonathan Eley Ways of avoiding it are generally not worth it How’s this for a business proposition? You invest a minimum of £25,000 into a new and unquoted company that promises to develop renewable energy projects. It is targeting an annual return of 6 per cent return, but will incur costs of up to 2.5 per cent. There’s also a 2.5 per cent initial charge, and the investment will only be accessible through a professional adviser, who doubtless will not be working for free either. Framed in those terms, it doesn’t sound particularly compelling, does it? The likely net return of 3.5 per cent is broadly comparable to the yield on the FTSE 100. Why put a fixed sum into an unquoted start-up venture with fairly stiff charges when you could put money into a tracker fund with rock-bottom costs, get the same net return just from the dividends paid by Britain’s largest and most financially secure companies, hopefully enjoy some price appreciation, and be able to sell any time you want? The answer is that money in the tracker fund would not be shielded from inheritance tax, which is the primary purpose of Albion Community Power, the product described above. Backed by Albion Ventures, once part of Close Brothers, it launches this week and aims to raise £25m from individual investors. It will be chaired by the Conservative MP Tim Yeo, a former energy minister who this week stepped aside as chairman of the Commons energy committee while allegations of influence-peddling are investigated. Albion says it has done lots of research that shows how worried people are about inheritance tax – of the 2,000 individuals it polled, 61 per cent had already taken advice about how to mitigate IHT, or planned to do so. Based on its figures, it estimates that over a million households expect to leave an average inheritance of more than £613,000. It proposes a “solution” to inheritance tax by utilising business property relief, which exempts qualifying investments from inheritance tax once they have been owned for two years or more. This is the same relief utilised by various other IHT avoidance ruses, such as shares quoted on the Alternative Investment Market, Enterprise Investment Schemes, farmland, forestry and so on. However, there’s a big snag with business property relief. It’s designed to facilitate the transfer of real businesses from one generation to another without incurring huge tax bills, or the funding of new growth companies. It’s not really intended to allow the rest of us to avoid paying tax on the accidental accumulation of housing wealth, which is what many are now effectively using it for. Many of the ventures that qualify for BPR will by definition be small and risky with a higher than average chance of failure. Their shares may not be easy to trade – or may not be traded at all – so you or your heirs might not be able to sell when you want or the price you want. In short, they are probably the sort of investment that you should be avoiding towards the end of your life. ACP has lessened the risks somewhat by focusing on renewable energy, which is backed by a myriad of government subsidies and reliefs, many of which are inflation-linked, and where it has past form – Albion Ventures says its existing renewables projects are generating returns of 11 per cent. Still, there are many other ways to avoid inheritance tax, most of which don’t involve risky investments and don’t cost much. You could set up a trust and place assets within it. This allows you to retain some control over how those assets are used while they are in the trust, because settlors are allowed to be trustees (just not beneficiaries). The assets lie outside your estate, although they are not completely exempt from tax charges. You can also make gifts out of surplus income, provided you can prove that the gifts are regular and that your everyday standard of living is not affected. Better still, you can give money away while you’re still alive. That way, you get to influence how it’s spent, enjoy the gratitude of the recipients, and get a warm glow from knowing that you are boosting the economy and facilitating the transfer of wealth and property to younger generations at a time when they most need it. There are two main snags with these approaches, though. One is that you cannot change your mind. You cannot withdraw money from a trust, nor can you ask your nephew to sell that snazzy sports car he bought with your surplus income in order to pay for your long-term care. The other is the “seven-year rule” – for larger gifts to lie completely outside your estate, you generally have to soldier on for another seven years. So whichever way you do it, avoiding IHT involves a lot of risks, uncertainties and trade-offs. That’s no coincidence. You’re not meant to avoid it. The Treasury collected £2.9bn from IHT in the 2011/12 tax year, and expects that figure to rise to £4.1bn in 2017/18 (see chart). No wonder the Conservatives, who in opposition advocated a nil-rate band of £1m, have now frozen the allowance at £325,000 until 2018, thus ensuring that more people will end up paying it. Is avoiding IHT really worth the bother? I’d say not. IHT is primarily a tax on wealth accumulated by accident, usually via an asset which is, stamp duty aside, largely untaxed elsewhere in the system. There is already a large nil-rate band and transfers between spouses are exempt. If you’re that worried about IHT, don’t wait to become a millionaire corpse: downsize and donate while you’re still alive. After all, you can’t take it with you. jonathan.eley@ft.com Continue reading
