The Implication of Income Tax Charge on Estate Planning

Written by Janine Byrne

Overview ============

Inrepparttar Pre-Budget Report of December 2003repparttar 119180 Chancellor Gordon Brown announced proposals to levy an Income Tax charge from 6th April 2005 in those circumstances whererepparttar 119181 transferor of an asset retains and interest or continues to benefit from that asset. Inrepparttar 119182 instance of real property,repparttar 119183 'benefit' envisaged isrepparttar 119184 transferor continuing to reside inrepparttar 119185 property he/she has allegedly given away.

Howrepparttar 119186 Charge Applies =======================

The Government refer to such assets as 'pre-owned assets' and, broadly speaking, its intention is to taxrepparttar 119187 'annual value' of such assets as a benefit-in-kind onrepparttar 119188 former owner still enjoyingrepparttar 119189 use ofrepparttar 119190 asset. The annual value on whichrepparttar 119191 charge is based will berepparttar 119192 open-market rental for a property or a fixed percentage ofrepparttar 119193 capital value of most other assets to whichrepparttar 119194 new charge applies. Any amounts whichrepparttar 119195 transferor pays forrepparttar 119196 use ofrepparttar 119197 asset - rent for example - will be deducted fromrepparttar 119198 annual value in arriving atrepparttar 119199 taxable benefit. The charge will also apply if a person providesrepparttar 119200 funds to purchase an asset which they go on to enjoyrepparttar 119201 benefit of after 5th April 2005.

Rationale Behindrepparttar 119202 Charge ============================

The charge is intended to counter many Inheritance Tax planning schemes, but unfortunately, it will also impact many innocent and unintended victims. Thankfully,repparttar 119203 legislation has included some exceptions torepparttar 119204 application ofrepparttar 119205 charge. The charge will not apply if;

The asset was gifted before 8th March 1986

The asset is owned byrepparttar 119206 transferor's spouse

The asset is, in fact, still caught byrepparttar 119207 'Gifts with Reservation' rules and as such Inheritance Tax applies instead (hence,repparttar 119208 Income Tax charge will not be levied on top).

The asset was sold at an arm's length price for cash (even if to a connected party).

The transferor ofrepparttar 119209 asset had themselves inherited it and their ownership had ceased as a result of a Deed of Variation affecting that inheritance.

The transferor's continued enjoyment ofrepparttar 119210 asset is merely incidental or has arisen only as a result of an unforeseen change in family circumstances.

The annual taxable benefit (after deducting any contributions byrepparttar 119211 transferor, where necessary) does not exceed £2,500.

The Inland Revenue have also confirmed thatrepparttar 119212 charge will not apply in most cases where a taxpayer has funded life insurance policies held on trust. Finally, there is also an 'Opt Out' option wherebyrepparttar 119213 transferor can opt not to payrepparttar 119214 charge providedrepparttar 119215 asset is included back into their estate and therefore consequently being subject to Inheritance Tax.

Deeds of Variation - Are They Justified?

Written by Janine Byrne

Introduction =============

Deciding to make a Will and then actually puttingrepparttar decision into action can be a somewhat stressful, upsetting and daunting task for some people. So it may be a little disconcerting to learn that after you have put all that effort and thought into planning your Will that there might be some opportunity for those left behind to change your instructions and alter your Will. after you are gone. It is a perfectly sound argument to point out that you haverepparttar 119179 right to leave your possessions to whom you please and therefore why should disgruntled beneficiaries be allowed to change your instructions? 

The Government's focus on tax avoidance,repparttar 119180 overhaul ofrepparttar 119181 trusts regime as proposed inrepparttar 119182 Pre-Budget Report 2004 andrepparttar 119183 consequent new legislation - Finance Act 2004 (to come into effect April 2005) - led some to believe that Deeds of Variation -repparttar 119184 means by which a testator's instructions in a Will are amended - would cease to be valid. However,repparttar 119185 Chancellor Gordon Brown did not rule out their existence and therefore such Deeds have continued application and relevance. So what exactly are Deeds of Variation, how are they created and what isrepparttar 119186 justification for their continued existence?

Deeds of Variation - What Are They? ====================================

A Deed of Variation is a written document which seeks to amend/vary certain instructions/dispositions in a testator's Will. The result of a variation to any Will is that one or more beneficiaries will have their entitlement affected in order to take into account someone else's new entitlement; this means that either their share is reduced in value or completely obliterated. The following example, (whilst probably very artificial), demonstratesrepparttar 119187 point.

Example -------

Maude in her Will left £6,000 to her son Michael and nothing to her daughter Michelle. To rectifyrepparttar 119188 unfairness ofrepparttar 119189 Will disposition Michael agreed to a Deed of Variation by which his share was split with his sister, thus allowing each to receive £3,000. In order to be legally valid,repparttar 119190 Deed must comply with certain conditions;

1) Must be made in writing. 2) All persons who were original beneficiaries inrepparttar 119191 Will and any persons who benefit fromrepparttar 119192 proposed variations inrepparttar 119193 Deed must signrepparttar 119194 Deed. 3) It cannot be given for money or money's worth. 4) It must be made within 2 years ofrepparttar 119195 death ofrepparttar 119196 decedent.

Consent ------- The first criterion is self explanatory so we turn torepparttar 119197 issue of consent. Withrepparttar 119198 above example in mind it appears clear why consent of all parties is required due torepparttar 119199 significant changes in a beneficiary's entitlement which can ensue from any variation. A clear indication of consent is a signature.

Money or Money's Worth ---------------------- The must be no inducement for a beneficiary of a Will to agree to a variation which would benefit someone else. Again, an example will demonstraterepparttar 119200 point.

Example -------

Walter leaves substantial gifts to his two children Jane and Wayne but consequently has left his widow Joan impoverished and unable to sustain herself. Jane and Wayne agree to give a share of their gifts to their mother onrepparttar 119201 agreement that Joan will return it to them inrepparttar 119202 form of PETs (potentially exempt transfers). This will be deemed to have been given to Joan for money or money's worth and thus will not constitute a valid Deed.

Made Within 2 Years of Death ----------------------------- The Deed must be made within 2 years ofrepparttar 119203 decedent's death and this time frame is due to issues of tax. If made after more than 2 yearsrepparttar 119204 Deed cannot be given retrospective affect for either Capital Gains Tax (CGT) or Inheritance Tax (IHT) purposes which, as we shall see, is one ofrepparttar 119205 main reasons Deeds of Variation are still used.

Justification for Deeds of Variation ======================================

Cont'd on page 2 ==> © 2005
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