Scathing criticism has been levelled at government measures to halt inheritance tax avoidance because 'ways around' the new system have already been developed.

In an 11-page response to a second round of government consultation, the Chartered Institute of Taxation and the ICAEW tax faculty roundly slammed the controversial pre-owned assets regime, which is designed to tackle inheritance tax avoidance, labelling it as 'arbitrary and capricious'.

One tax expert close to the debates warned that there were already people on the lecture circuit talking about 'ways around' the proposed legislation, which is due to come into force in April 2005.

One such way to avoid the proposed tax would be for a child to take out a mortgage to pay for a parent's house in full, only for the parent to hand the child an 'unconnected' cash gift of a similar amount some time later.

'As soon as you bring in complicated new rules there will be clever people that will find ways around them,' said Anita Monteith, a technical manager in the ICAEW tax faculty.

The regime is designed to stop taxpayers avoiding inheritance tax by continuing to use and enjoy property or possessions after the date they were given away. Monteith warned that a lot of people would get 'clobbered' by the legislation, despite Inland Revenue claims that it is ensuring the regime 'exclusively targets those engaged in abusive tax avoidance'.

'Everyone knows that this legislation is designed solely to tackle people using contrived, complex schemes drawn up by expensive tax advisers to avoid tax,' a Revenue spokesman said.

But the two tax bodies highlighted four areas it found disturbing about the proposed regime.

They are that it is 'retrospective in its effect; disproportionate to the mischief at which it is purportedly aimed; contrary to taxpayers' legitimate expectations and arbitrary as based on unquantifiable concepts'.

Property valuations were of particular concern to the two bodies. Because the valuation process was 'very much an art rather than a science', they believed anomalies would creep in.

To read the joint response in full, visit the CIOT website at www.tax.org.uk