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Inheritance Tax Threat After Trust Crackdown

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Families trying to avoid paying crippling death duties will be forced to tell the Government of their plans under tough new rules.

Parents and grandparents trying to legally avoid inheritance tax by transferring property and other valuables into trust will from next April have to inform the taxman as soon as they have done it.

The move is part of a clampdown on tax avoidance unveiled by Treasury minister David Gauke yesterday.

It is the most aggressive of the measures and represents a change from detecting tax fraud after the event to forcing people who could be able to evade tax to register their intentions in advance so they can be monitored to prevent them breaking the law.

The new disclosure rules are widely seen as the first step towards outlawing trusts altogether.

The measures announced yesterday are designed to protect forecast revenues estimated at up to £5bn over the next four years, and are expected to raise over £2bn in additional revenue during the course of this Parliament.

A crackdown on tax avoidance was one of the key planks of the Liberal Democrats' election campaign and became part of the Coalition agreement struck between the LibDems and the Conservatives.

A raft of measures against dodging all varieties of taxes - including corporate, income, national insurance and VAT - was also revealed.

These include preventing groups of companies using intra-group loans to reduce tax bills.

Official figures suggest companies and individuals have been getting shrewder, as the cost of avoidance and evasion rose by £4bn to £42bn in 2008-09.

John Whiting, of the Chartered Institute of Taxation, welcomed the moves, saying they were aimed at 'trying to block the side-stepping of the rules' by people 'with considerable wealth'.

Neal Todd, senior partner at law firm Berwin Leighton Paisner, said the Government had promised a more stable tax system, but the new measures 'were a hash and will not help restore business confidence in the UK tax system'.

More

The Treasury has unveiled a raft of tax avoidance measures expected to raise over £2bn and protect a further £5bn by 2015.

One of the measures is aimed specifically at clamping down on inheritance tax avoidance, but what exactly is the government doing and why?

What has the government said?

The government will require tax advisers to inform the Treasury of all new schemes that involve transferring property into trust.

This is because HM Revenue and Customs has said a string of new schemes has emerged to avoid paying the 20 per cent tax charge levied when a property is transferred into trust. Properties transferred in this way also avoid inheritance tax levied at 40 per cent on estates worth more than £325,000.

The measures will bring inheritance tax into the tax avoidance disclosure regime, which was introduced a few years ago under the previous government.

Who will be caught?

The new measures will not affect people who have already set up trusts to protect their estates from inheritance tax. They will also not require existing trust schemes to be closed.

What other measures have been introduced?

With immediate effect, groups of companies will be banned from using intra-group loans or derivatives to reduce their corporation tax bill.

Ministers have also proposed to tackle firms who “artificially split” the supply of their services to reduce VAT.

The Treasury also plans to clamp down on “disguised remuneration” - company schemes used to reward employees which seek to avoid or defer the payment of income tax or National Insurance Contributions (NICs).

It also signalled that it will stop investment companies retrospectively changing the currency in which they prepare their accounts for tax purposes.

Why are they doing it?

The steps are part of an ongoing move by the government to clamp down on tax avoidance and is expected to save up to £5bn over five years.

But some tax advisers said they thought the move was more of a political measure than a tax measure.

“The Treasury is simply extending the disclosure regime for IHT that was introduced under the previous government,” said Mike Warburton, senior tax partner at Grant Thornton. “I think the Liberal Democrats want to show that they are being tough with tax avoidance.”

Will there be more information later in the week?

Yes, more anti-avoidance measures are expected later this week, along with a draft protocol that will set out the circumstances in which the Government will consider changing legislation with immediate effect.

What IHT schemes are still around?

*An annual IHT exemption allows you to give away £3,000 in each tax year, either as a single gift or as several gifts.

* If you do not use up this £3,000 exemption in one year you can carry it forward, for one year only.

* Smaller gifts of up to £250, to as many people as you like, are also exempt - designed for birthday and Christmas presents.

* Wedding gifts of up to £5,000 from parents, £2,500 from other relatives and £1,000 from anyone else are permitted.

* Gifts to charity, political parties and bodies such as national museums and universities are exempt, no matter how large.

* Outside these allowances, gifts made more than seven years before your death are not liable for IHT.

* You can write your life insurance policy into trust so that it is not subject to inheritance tax.

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The tax efficiency element of Trusts disappeared about 3 years ago. Their only function now is to prevent someone from having your money permanently. In other words, they are used as a means of control over someone. For example, if your marriage fails, the Trust can claw back the money given to your spouse. Odd really, because they are actually used where there is a lack of trust.

Typical for 'Old Blighty', as this situation wouldn’t arise in say, France, where laws insist that your wealth must go to the immediate relative (s). But in this neurotic country, everybody is well and truly controlled.

The only tool available for the efficient transfer of wealth is to give it away, 7 years before you die. This Government want to increase the time scale to 14 years, for obvious reasons.

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This is all ridiculous. On one level paying taxes when you're dead is the best time for anyone to pay tax surely.

On another you can't catch the buggers and the costs of the industry surrounding it is ludicrous froma society viewpoint.

On the basis it is only the 'little people' that pay inheritance and capital gains taxes and therefore stops 'mobility', I would sweep them away in the favour of a land/property tax. This would help the economy to become more competitive too by driving down costs.

Yep - so true.

Why is no tax paid on land value, but is on buildings? Seems an unfair advantage to the landowner.

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"We're all in this together"

Inheritance from a 'sovereign to sovereign' or the consort of a sovereign to a reigning monarch is exempt from the 40% tax, above a £250,000 threshold.

This was agreed with former Conservative Prime Minister John Major in 1993.

He accepted it in recognition of the need for the sovereign to avoid erosion of the Royal Family's wealth.

A Buckingham Palace spokesman said: "Queen Elizabeth the Queen Mother has bequeathed her entire estate (which mainly comprises the contents of her houses) to the Queen.

http://news.bbc.co.uk/1/hi/uk/1993665.stm

(Assuming that still obtains).

The erosin of every other family's wealth is of course perfectly acceptable.

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Yep - so true.

Why is no tax paid on land value, but is on buildings? Seems an unfair advantage to the landowner.

That change would be the best change that could be made to the current tax system. Revenue would be easy to collect, and the tax difficult to avoid, and be utterly fair.

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"We're all in this together"

http://news.bbc.co.u.../uk/1993665.stm

(Assuming that still obtains).

The erosin of every other family's wealth is of course perfectly acceptable.

The knobs with 10's if not 100's acres UK land get around the inheritance tax thru a loophole where a farmer can pass farmland on to the son/daughter for continuity - tax free!

We are NOT all in it together. Rule may have changed slightly since I last read that!

Oh and of course there are all those 'hidden' off-shore trusts/companies set up in the Cayman Islands et al preserving their "Crocks of Gold"

Bloody Pirates!

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"Crippling" death duties? Let's not forget that the first £325,000 of any estate is currently tax free.

Meanwhile the serfs start paying income tax at a princely £6,475 a year.

I don't have much sympathy for the middle aged offspring of millionaires.

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If I end up old and quite rich, I will convert large chunks of my money to cash, gold bars, jewellery, cars and other expensive things, and then give them to my relatives etc.

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If I end up old and quite rich, I will convert large chunks of my money to cash, gold bars, jewellery, cars and other expensive things, and then give them to my relatives etc.

That's very selfish of you...........:)

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That's very selfish of you...........:)

Why is thinking of your family before the greedy, money-wasting taxman selfish?

Charity, as they say, begins at home!

When the last pointless war we are involved in has been cancelled, the last divershitty co-ordinator sacked, and the last asylum seeker (failed or not) sent packing, and the last peedo castrated, THEN I might feel more generous to the government's needs.

Until then, the thieving politicians can **** off.

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Why is thinking of your family before the greedy, money-wasting taxman selfish?

Charity, as they say, begins at home!

When the last pointless war we are involved in has been cancelled, the last divershitty co-ordinator sacked, and the last asylum seeker (failed or not) sent packing, and the last peedo castrated, THEN I might feel more generous to the government's needs.

Until then, the thieving politicians can **** off.

I agree, however, you could give the money to those less fortunate.

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Why is thinking of your family before the greedy, money-wasting taxman selfish?

Charity, as they say, begins at home!

When the last pointless war we are involved in has been cancelled, the last divershitty co-ordinator sacked, and the last asylum seeker (failed or not) sent packing, and the last peedo castrated, THEN I might feel more generous to the government's needs.

Until then, the thieving politicians can **** off.

I was joking :)

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If I end up old and quite rich, I will convert large chunks of my money to cash, gold bars, jewellery, cars and other expensive things, and then give them to my relatives etc.

Don't wait too long. All of those things will have to valued and declared when you die, as gifts during your lifetime. If you live for seven years after the gift, it will be assumed that it really was a gift. If you die before the seven years are up, then it will be assumed that such gifts count as attempts to get round inheritance tax.

If the tax man has any reason, or none, to suspect that you might have been trying to get round IHT, then he can sniff around your affairs for the decade prior to your death, and all the monies, cars, expensive trinkets which your family might have acquired, and see if the two might be linked. If he thinks they are, then those gifts will be valued, and the the amount included in your IHT calculation. All of this will take ages, and may involve all sorts of unpleasantness.

In the meanwhile you can give away the princely sum of £3,000 every year, including Christmas and birthday presents, without it adding to your IHT bill. Note: this means £3000 in total, not per recipient. If you want to give away more, then you had better consult a tax specialist. Ideally you should keep an exact record of all sums of money (including those much lower than £1000), or gifts or contributions so that you can tell the tax man all about it - even if only to prove that they weren't larger. If you don't HMRC may try to winkle such records out of your other financial records, to the distress and dismay of your heirs.

This is part of what HMRC have to say on their site (emphases mine):

HMRC on exempt gifts

If your estate is worth more than the Inheritance Tax threshold - £325,000 for the 2010-11 tax year - there are some important Inheritance Tax exemptions that allow you to make gifts to others and not have to pay tax on them when you die.

Annual exemption

You can give away gifts worth up to £3,000 in each tax year and these gifts will be exempt from Inheritance Tax when you die. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don’t use it in that year, the carried-over exemption expires.

The annual exemption is in addition to the other gift exemptions.

Exempt gifts

Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it.

Wedding gifts/civil partnership ceremony gifts

Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:

* parents can each give cash or gifts worth £5,000

* grandparents and great grandparents can each give cash or gifts worth £2,500

* anyone else can give cash or gifts worth £1,000

You have to make the gift - or promise to make it - on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift - or if you make the gift after the ceremony without having promised it first - this exemption won't apply.

Small gifts

You can make small gifts up to the value of £250 to as many people as you like in any one tax year. However, you can’t give a larger sum and claim exemption for the first £250.

You can’t use your small gifts allowance together with any other exemption when giving to the same person.

The seven-year rule - 'potentially exempt transfers'

Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as 'potentially exempt transfers' (PETs).

However if you give an asset away at any time, but keep an interest in it - for example you give your house away but continue to live in it rent-free - this gift will not be a potentially exempt transfer.

If you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate.

However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.

You have been warned.

Edit: gifts between spouses don't count, and each spouse has their own IHT allowances. If you need to know that, investigate matters much more thoroughly with a professional.

db

Edited by deeplyblue

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You would be surprised at the number of posters around here that support existing tax, increased tax and new tax, yet they say that renting out a property is immoral, no joke.

There are lots of socialists / communists around, its unsurprising that some will have found their way here.

As to posters who think the tax man is some sort of all knowing super spy. Get a grip, they cant even get PAYE right, and you seem to imply that everyone old person who dies has a tax audit. Any what do old people love to deal in? Cash. Untraceable.

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As to posters who think the tax man is some sort of all knowing super spy. Get a grip, they cant even get PAYE right, and you seem to imply that everyone old person who dies has a tax audit. Any what do old people love to deal in? Cash. Untraceable.

I am very sure that a lot of people who break this sort of law do not get caught. Housing benefit fraud, illegal imports of cigarettes, failure to insure your car, using cannabis, not disclosing a source of income - all of these things go on all the time. But it is usually advisable to know when you are breaking a law - ignorance is no plea when you are caught, and you should know what risks you are running, and what you are trying to hide.

Many older people used to prefer dealing in cash, but that is getting more difficult. It is, for example, hard to get your pension paid to you in cash by the Post Office - you need a bank account. This cuts off a major source of cash. If you can manage to pay for your electricity etc by direct debit then you will save money - but it's a cashless transaction. And so on. But the sort of old people you are talking about are probably not wealthy enough to worry about having £20,000 in used notes to pass on to their children anyway.

There is also the issue of what the recipient would do with it. If they start putting large amounts into their bank accounts unexpectedly then the banks can investigate the possibility of money laundering. So they have to spend it in cash also.

But all of this only applies to people who have estates where a single person has more than £365,000 to pass on anyway - and if you're inheriting money from a couple, then the amount is higher still. kingsgate was proposing - when he was old and rich to "convert large chunks of my money to cash, gold bars, jewellery, cars and other expensive things" and that amount of bling might attract the attention of the tax man. I was pointing out that bling is not a form of legal tax avoidance.

The tax regulations which I quoted are aimed at people trying to transfer not small sums out of income (which are specifically exempted in a bit I didn't post), but largish amounts of capital - and it is rather easier to see when someone has removed £30,000 from their bank account, especially if a sub poena will reveal that £30,000 went into someone else's bank account just when they needed that sum to get a mortgage.

Probably the easiest way to get round that sort of thing is to use easy-to-overlook or hard-to-value assets like paintings. But this only works if the painting is not immediately sold for a large sum by the recipient.

When you want probate on an estate over about £5000, you have to put in a tax return before you can get at the cash or visible fixed assets. If HMRC don't pass that tax return, you won't get probate. I imagine that something in excess of 99% of estates, HMRC take a quick look at the return, see "house, contents, a few shares, a plausible amount of saving," and say, "Sounds about right - no problems." But I imagine that they do sometimes see something that makes them want to look a little deeper - and then they can do a lot of digging and keep insisting on more and more documentation.

The PAYE thing was another large IT project gone wrong, not a failure of imagination on the part of HMRC staff.

db

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