The Inland Revenue plans to impose a harsh new tax regime on thousands of homeowners who have set up so-called "home-loan schemes" to avoid inheritance tax on their houses. The clampdown, which was not spelt out in Gordon Brown's pre- Budget report on Wednesday, will impose income tax on people who enjoy the use of assets they have given away. Higher rate taxpayers who have set up such schemes and live in a house worth Pounds 500,000 face paying an extra Pounds 12,000 a year, Ernst & Young estimates, assuming a yield of 6 per cent and implied benefit of Pounds 30,000.
The Revenue's action is highly unusual in that it applies to existing schemes, even those set up some years ago. Lawyers and accountants that market the schemes estimate that up to 20,000 households will be affected. Many will have been driven to tax-avoidance measures by rising house prices. The threshold for inheritance tax, now Pounds 255,000, has been raised in line with inflation over the past few years, but a London house that would have sold for Pounds 250,000 in 1998 has more than doubled to Pounds 540,000.
Paul Knox, tax director at Ernst & Young, said: "It is very unexpected to use income tax to solve an inheritance tax problem. In future, middle Englanders will have to think carefully about aggressive tax planning." Home-loan schemes are designed to get around Revenue rules brought in to ensure that "gifts with reservation" - where donors give away assets but maintain the use of 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 plans, detailed in a consultation paper spotted by accountants yesterday, would force donors to pay income tax on the estimated benefit of continuing to live in the house. The Revenue is allowing people until April 2005 to dismantle these plans or start to pay full rent. After then, most people who have set up home-loan schemes will be taxed in this way.
Mr Knox said even those taxpayers who could dismantle schemes could face substantial costs. "Most home-loan schemes will be caught by these new rules," said a leading provider. It said the Revenue seemed determined to end the loophole. Francesca Lagerberg, national tax director at accountants Smith & Williamson, said: "The Revenue has been adamant in its dislike of double-trust arrangements."
The Revenue's action is highly unusual in that it applies to existing schemes, even those set up some years ago. Lawyers and accountants that market the schemes estimate that up to 20,000 households will be affected. Many will have been driven to tax-avoidance measures by rising house prices. The threshold for inheritance tax, now Pounds 255,000, has been raised in line with inflation over the past few years, but a London house that would have sold for Pounds 250,000 in 1998 has more than doubled to Pounds 540,000.
Paul Knox, tax director at Ernst & Young, said: "It is very unexpected to use income tax to solve an inheritance tax problem. In future, middle Englanders will have to think carefully about aggressive tax planning." Home-loan schemes are designed to get around Revenue rules brought in to ensure that "gifts with reservation" - where donors give away assets but maintain the use of 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 plans, detailed in a consultation paper spotted by accountants yesterday, would force donors to pay income tax on the estimated benefit of continuing to live in the house. The Revenue is allowing people until April 2005 to dismantle these plans or start to pay full rent. After then, most people who have set up home-loan schemes will be taxed in this way.
Mr Knox said even those taxpayers who could dismantle schemes could face substantial costs. "Most home-loan schemes will be caught by these new rules," said a leading provider. It said the Revenue seemed determined to end the loophole. Francesca Lagerberg, national tax director at accountants Smith & Williamson, said: "The Revenue has been adamant in its dislike of double-trust arrangements."
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