Family businesses which pass premises down between generations could be caught in Britain's plans to close loopholes in the inheritance tax regime, say experts familiar with the Labour government's new budget proposals.
"To date, most people's attention has been focused on the impact the government's plans will have on gifts between spouses such as a share in the marital home," said Richard Kirby, a partner at City law firm Speechly Bircham.
Kirby said the way the proposals are currently drafted suggest that parents who have sold the premises of a family business to one of their children so they can 'semi-retire' will also be caught. "This tax is retrospective so it doesn't matter how long ago the sale took place," he said. "A gift of property valued at £250,000 could lead to an income tax charge of more than £8,000 a year.
In the run-up to the spring budget speculation had been rife that inheritance tax would come under renewed scrutiny by the government. Inheritance tax is a 40% tax imposed on a deceased person's estate for all assets in excess of £242,000 (in the 2001-02 tax year), including certain lifetime gifts, although all bequests to a spouse and to charities escape the tax.
Speechly Bircham said the government's proposals on pre-owned assets are intended to target people who have sought to avoid inheritance tax by giving away assets they can still use, such as a family home. However the new rules will also apply to transfers of business or agricultural property where the donor 'reserves a benefit', the law firm said.
Gordon Brown, Britain's chancellor, faced a backlash over the clampdown on tax avoidance to boost revenues. The budget, made public on 17 March 2004, was seen as an act to mop billions of pounds of revenue lost because of tax avoidance schemes.
Financial advisers warned that by clamping down on loopholes, the chancellor would retrospectively hit businesses and individuals who had legitimately tried to reduce tax. As Families in Business went to press the chancellor was expected to act on so-called pre-owned assets. Tax experts at BDO Stoy Hayward, the accountants, believe it fundamentally wrong to fix the problems of one tax – inheritance tax – by introducing a new income tax charge.
BDO Stoy Hayward said in a statement that a new tax to counter inheritance tax avoidance schemes, considered 'abusive' by the Inland Revenue, would see those who give away their homes yet remain in occupation (on a rent free basis) landing their family with an annual tax bill they may be unable to afford.
"If the proposal becomes legislation, it could give rise to a number of practical difficulties and be very costly for taxpayers," said Stephen Herring a partner in the firm. "They may be expected to arrange for the valuation of their assets annually or periodically. It would also increase the workload for the Capital Taxes Office, which could mean long waiting times for the taxpayer."
Gordon Brown announced in December's pre-budget report that he planned to make it more difficult for people to avoid inheritance tax by giving away assets while continuing to enjoy the benefits of ownership. In a discussion paper issued in December the Inland Revenue said anti-avoidance legislation was appropriate for those who use trusts to avoid tax.
In broad terms, the aim of Britain's Inland Revenue is to update trust administration and bring the capital gains regime into line with income tax purposes, Ian Johnson, head of private client services at Grant Thornton told the Financial Times on 13 March. The financial adviser warned in February that parents who wished to help their children onto the property ladder should think twice before doing so as government plans could land them with an income tax bill later on in life. Ian Luder, tax partner at Grant Thornton, predicted nothing short of chaos. "The fact these new rules will be respectively implemented will wreak havoc for hundreds of thousands of people".