So-called double trusts, set up to avoid paying inheritance tax, will cease to be effective from a tax point of view following an announcement in the Budget, writes Lucy Warwick-Ching. Home-loan schemes were designed to get around Revenue rules brought in to ensure that "gifts with reservation" - where people give away assets but still use them - are subject to inheritance tax. These plans work on the basis that taxpayers sell the house they live in to a trust in return for an IOU.
The taxpayer then gives the IOU to heirs through another trust, but continues to live in the house. The Revenue proposes forcing donors to pay income tax on the estimated benefit of continuing to live in the house.
The plans announced in yesterday's Budget were more lenient, allowing trustholders to treat the trust as though it had never been set up, thus placing the house back into the owners estate. "The government proposals will allow people to get back to the status quo without having to wind up the trusts, which would have been expensive and very time consuming," says Simon Rees, senior manager at PwC. Taxpayers in existing schemes may choose a special transitional treatment if they elect for this by January 31 2007.
If they so choose, they will not be subject to the new income tax charge in relation to property covered by the election. But the property in question will be treated as part of their taxable estate for IHT purposes, while they continue to enjoy it in essentially the same way as under the existing "gift with reservation" rules.
The taxpayer then gives the IOU to heirs through another trust, but continues to live in the house. The Revenue proposes forcing donors to pay income tax on the estimated benefit of continuing to live in the house.
The plans announced in yesterday's Budget were more lenient, allowing trustholders to treat the trust as though it had never been set up, thus placing the house back into the owners estate. "The government proposals will allow people to get back to the status quo without having to wind up the trusts, which would have been expensive and very time consuming," says Simon Rees, senior manager at PwC. Taxpayers in existing schemes may choose a special transitional treatment if they elect for this by January 31 2007.
If they so choose, they will not be subject to the new income tax charge in relation to property covered by the election. But the property in question will be treated as part of their taxable estate for IHT purposes, while they continue to enjoy it in essentially the same way as under the existing "gift with reservation" rules.
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