The Paymaster General, Dawn Primarolo, has announced new regulations which will prevent someone being charged double Inheritance Tax (IHT) when they dismantle an IHT avoidance scheme involving a pre-owned asset, such as their own house.
Since the new pre-owned asset tax was introduced in April last year, many people have dismantled schemes that were designed to avoid IHT on their family home while allowing them to continue living there. The new pre-owned asset (POA) regime specifically targetted such schemes, imposing income tax on assets that are given away but still used by the original owners.
Rather than pay the income tax, many people chose to bring their home back into their estate for IHT purposes, either by formally electing to do so, or by unravelled the IHT avoidance scheme. However, in both of these cases, there was the possibility of a double IHT charge. New regulations were announced in March which prevent double IHT when a person elects to bring their home back into the IHT net. The recent announcement addresses the other double IHT trap, which affects people who chose to unravel their avoidance scheme.
In particular, the new regulations give relief from double taxation that may arise through the use of a 'double trust' arrangement, where somebody sells an asset to a trust in which they retain an interest, receive an IOU in exchange and give that IOU to a second trust. The gift of the IOU is a potentially exempt transfer for IHT purposes, and its value will be chargeable to IHT if the scheme user dies within seven years of setting up the scheme. But if the scheme is dismantled within those seven years, so that the full value of the original asset - for example the family home - is part of their estate when they die, the asset's value will also be subject to IHT.
Primarolo's announcement says that if 'the full value of that asset, or of property derived from it, is also chargeable to IHT as part of the donor's estate at death,' then 'relief will be given so that tax will be due only on the more valuable of the two chargeable assets'.
The wording of the new regulations will appear on the HM Revenue & Cusotms website when drafted.