In anticipation of the new regime it is important that anyone who has undertaken Inheritance Tax (IHT) planning (since 1986) involving land,...

In anticipation of the new regime it is important that anyone who has undertaken Inheritance Tax (IHT) planning (since 1986) involving land, chattels or “tax-efficient investments” should have their arrangements reviewed. The POA charge start date, 6 April 2005, is not far away and those potentially affected should understand the choices available and decide how they will respond.
Here we focus on the options available to those individuals who undertook transactions involving land and chattels:

LAND
Elect back into IHT
This involves giving up the benefit of the Inheritance Tax “arrangement”. By electing into the Gifts With Reservation (GWR) rules, the asset concerned will form part of the taxable estate on the individual’s death.

It seems this is the route that the Inland Revenue would like many to follow and though straightforward it is not without its pitfalls. It is an irrevocable election and if the POA
charge were subsequently withdrawn or reduced in scope it may not be possible to get back into the IHT beneficial position. Even though IHT can be charged on the asset value on death, the heir still does not benefit from a Capital Gains Tax free uplift to market value at that time.

Move out of the property
For some taxpayers the option of moving out of the property, usually the “main” house, will be a realistic possibility. In some circumstances this may coincide with a decision that was almost inevitable. If this path is pursued before 6 April 2005 then there should be no POA implications
but the move can be delayed beyond that date accepting the charge until departure.

Pay the “market” rent
The POA charge is reduced by paying(under a legal obligation) an appropriate rent for the occupation and enjoyment of the property. However, determining the maximum amount required to be paid to mitigate the charge fully is likely to be a complicated matter.

Pay the POA charge
Whilst at first glance this might appear to be a very unattractive option there will be some
circumstances where the appropriate decision will be to pay the charge. It has the attraction of preserving the benefits of the IHT planning already carried out which may outweigh the cost of paying the charge, especially where the life expectancy of the donor is relatively short.

CHATTELS
It had originally been thought that the gift and leaseback of chattels at a negotiated full rent would still be subject to a charge on the difference between the Official Rate of interest of 5 per cent and the actual rent paid. This is no longer the case although the same measure of care is needed to ensure the rent paid will be sufficient to avoid falling foul of the GWR regime.

On the other hand, the POA regime will apply to chattels gifted but enjoyment retained under a lease carve-out arrangement. Here the options available are substantially the same as those outlined above in relation to land.

This is an evolving, and complex, area of legislation and WealthBriefing subscribers will be kept fully abreast of changes.