New legislation aimed at preventing illegal inheritance tax avoidance schemes will be unfair and affect those not trying to avoid paying the tax, ICAS has warned.
The Scottish Institute said it agreed with the objective to stamp out ‘contrived arrangements to avoid inheritance tax’ but said the current proposals due to take affect in April 2005 were ‘ill conceived’, ‘inadequately drafted’ and ‘may prove unworkable’.
Donald Drysdale, assistant director of tax at ICAS said:
‘We are deeply concerned about the new measures. As they stand, they will impose unfair and arbitrary tax liabilities on many individuals, including those of limited means who have made no attempts to avoid inheritance tax. The new tax is not restricted to wealthy tax avoiders.
‘It will affect everyday family situations – husbands and wives, unmarried couples, families.
‘It is particularly unfortunate that the government should choose to introduce a new tax now on transactions that were undertaken as long ago as 1986.
Ordinary taxpayers are expected to self assess their tax liabilities, but they are unlikely to understand a new tax that is imposed retrospectively by reference to past transactions. To make matters worse, detailed records of many of those transactions may no longer exist.
Some case examples from ICAS
Example 1: In 1987 a successful entrepreneur bought a £40,000 cottage for his widowed mother. She lived there for 10 years and then died, bequeathing the property to her son. He retained the cottage, now worth £200,000, as a holiday home. Under the proposals, he will have to self assess and pay income tax on the annual rental value of this property even though he owns it himself and it is included within his estate for inheritance tax.
Example 2: A father, son and grandson, in partnership together, used to farm land owned by the father. Anxious to preserve the business as a profitable entity, the father gifted the land to his son in 2002 but, in doing so, he carved out a lease in favour of the partnership. For inheritance tax purposes, the gift was potentially exempt, and in any event agricultural property qualifies for 100% relief, so there was no intent by the father to avoid such tax. Because the father is a continuing partner in the business, he is regarded as occupying the land that he gifted, and he will therefore have to self assess and pay income tax on the annual rental value representing his occupation.