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Last Updated: Friday, 20 June 2003, 18:55 GMT 19:55 UK
Crackdown on property tax loophole
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Inheritance tax laws are changing

Thousands of people could in future be forced to move out of their homes to avoid inheritance tax, following a crackdown on an increasingly popular tax loophole, experts say.

In recent years it has become attractive to shelter estates from inheritance tax through trusts, because escalating house prices have pushed more families into the inheritance tax bracket.

Under the new rules, which take effect immediately, a homeowner will still be permitted to set up a trust to shelter his or her estate from IHT, but not live in the former home after it has been gifted.

This is because the government announced on Friday it had made it an offence to "receive any material benefit from the gifted asset", such as living in the property - once it has been gifted through a trust.

The rules are not retrospective, but it will mean people who use trusts in the future will be forced to sell up, move out, or pay the tax.

High house prices

Inheritance tax is charged at 40%, on estates with assets of more than 255,000, but in many parts of the South East of England, average property prices are much higher.

As a consequence, the schemes have become more popular with middle-income earners.

The hub of the problem is that inheritance tax bills just have not gone up to reflect house prices.
John Whiting, Pricewaterhouse Coopers

Chas Roy-Chowdhury of the Association of Chartered Accountants, said the crackdown was very unfair on ordinary people, as the wealthy still had many ways of getting round the inheritance tax rules.

"People who are using these schemes are just average people.

"If your main asset is your property you are going to be affected but if you are very wealthy there are still a variety of tax avoidance measures at your disposable".

Anxious wait

People who have already set up the trusts and continue living in the properties, are still facing an anxious wait on a legal case which is now heading for the House of Lords.

The Inland Revenue is seeking to challenge a Court of Appeal judgement which gave its blessing to such schemes.

The Court of Appeal had ruled in the Eversden cases that a Mrs Greenstock could benefit from assets she placed in a trust that she set up for her husband.

Under traditional inheritance planning, you can gift your property under certain circumstances, but can not continue to live in it afterwards.

"The hub of the problem is that inheritance tax bills have not gone up to reflect house pries," said John Whiting of Pricewaterhouse Coopers.

"Take a house worth half a million. In principle, you are looking at an inheritance tax bill at 100,000 when it eventually goes to the kids. Half a million may sound like a lot of money but so does 100,000."




SEE ALSO:
Homeowners caught in tax trap
08 Nov 02 |  Business
Understanding inheritance tax
14 Oct 02 |  Working Lunch


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