Gordon's new tax on families

Published on 31 March 2005

People carrying out ordinary family arrangements may in future have to pay income tax without actually receiving any income, under anti-avoidance legislation coming into force from 6 April. The new charge to income tax on'pre-owned assets' was conceived to counter sophisticated schemes set up to avoid inheritance tax. But it will give rise to income tax liabilities and expense to many ordinary people who would never even have thought of trying to avoid inheritance tax.

The new tax resembles the proverbial sledgehammer used to crack a nut, but makes no attempt even to point the sledgehammer at the right nuts.

A punitive tax charge which could catch the innocent

The pre-owned assets tax, or POAT for short, is an annual charge to income tax on the annual value of assets which the taxpayer has given away but continues to enjoy in some form. It also catches situations where the taxpayer has contributed to the acquisition of property from which he later benefits.

The POAT is aimed at schemes which try to circumvent the so-called 'gifts with reservation' (GWR) rules in inheritance tax. The GWR rules prevent a person from reducing their taxable estate by giving away property while continuing to enjoy it, such as giving one's house to one's children then continuing to live there.

The Government were understandably concerned about leakage of public revenue from sophisticated schemes, involving large amounts of money, designed to get around the GWR rules, particularly as some had been upheld by the courts. But the Government's response, to impose an annual income tax charge which goes wider than the original IHT provisions, seems to many to be disproportionate to the mischief targeted.

People are only excluded from the charge if their particular circumstances are covered by one or other of the exemptions set out in the legislation. If they fall outside those exemptions, however innocent their motives may be, they risk being charged to tax, and will have to pay valuation fees to find out how much they must pay.

Even those who are not within the strict wording of the legislation may well have to spend money on professional fees to establish whether they are caught or not, or - if they are - whether the paltry exempt amount of £5,000 per year covers them.

What situations are caught?

Below we set out four scenarios, examples of transactions which are not - so far as we can tell (for the drafting is very obscure) - excluded or exempt from the new charge. We invite our readers to judge for themselves whether they seem to be ordinary family arrangements, or cunning tax avoidance schemes.

A mother and father help their daughter and son-in-law with the purchase of a new house. Time passes and the son-in-law vanishes from the scene. The daughter becomes severely ill long-term. Six years after giving the money, the mother and father move into the house to help look after the grandchildren. On our reading of the legislation, the mother and father would be caught, and would have to pay an annual tax based on the extent of their contribution to the original purchase.
A mother and daughter decide to live together on the death of the father. By way of an outright gift, the mother partly finances the daughter's purchase of an interest in the house where they both live. Time passes and the daughter decides to move abroad to work and live long-term. The daughter retains her stake in the house where the mother continues to live. The mother would be liable to the tax charge each year ad infinitum. 
As 2 above, but instead of making an outright gift, the mother lends the finance to her daughter who will repay her in due course. The mother will still be caught, even after the loan has been repaid. 
A son lends his mother the money to buy herself sheltered accommodation. When she is unwell the son stays with her in her sheltered accommodation. This time it is the son who is caught. 
These are just examples. There will be other, similar, situations the tax status of which are about to become uncertain.

Ministers have said that there is no intention of catching the innocent. That may very well be the case. A court, however, will look not at what ministers have said but at how the law is drafted, and unfortunately the law is drafted in such a way that the innocent could well be caught.

Accordingly, we also invite the Revenue to explain to us, with reference to the strict terms of the legislation, why they think these cases are not caught.

(31-03-2005)

Contact Name: Robin Williamson (Contact tel: 0844 579 6700, Fax: 0844 579 6701)