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The Inland Revenue has gone back on an assurance that certain types of trusts would not be affected by a new tax regime due to kick in next year.

Gift-and-loan trusts, which are sold widely by insurance companies and are often used by families to shield assets from inheritance tax, will become subject to a new income tax charge from next April, the Revenue confirmed yesterday.
All such trusts set up since March 1986 will be affected, but the Revenue has yet to detail how high the new tax charge will be or how it will be applied. This has left insurers and financial advisers in a state of confusion.

It is thought about 100,000 gift-and-loan trusts are arranged each year. Although there are various ways to use gift-and-loan trusts, users typically 'lend' assets or cash worth £100,000 or more to the trust and draw back "repayments" of 5pc a year over 20 years free of tax. Interest rolls up free of tax, outside the estate of the owner of the trust and this can be left to beneficiaries free of inheritance tax.

Leigh Francis, taxation manager at the Association of British Insurers, said: "This change has come as a big surprise to us. The Revenue's original view was that the new regime would not affect these trusts. They have changed their minds. We are disputing their technical analysis."

The tax regime on pre-owned assets is still subject to consultation but must be implemented next April. It is being introduced as part of a clampdown on people who attempt to shield assets from tax while "potentially" retaining possession of them. Clive Scott-Hopkins, director of financial adviser Towry Law, accused the Government of a "knee-jerk reaction". He believes trusts are the innocent victim of an attempt to clamp down on more obvious tax avoidance schemes usually used for family homes.

"The Government is too scared to attack the inheritance tax regime any more, so it is bringing this in by the back door instead," he said.
Howard Flight, shadow chief secretary to the Treasury, accused the Government of undermining traditional British tax law with the new measures.
He said: "The pre-owned assets measures have elicited more complaints from constitutional lawyers and others than anything else in this year's Finance Bill. It seems that yet again, the Government is coming under fire for its misguided and ill-thought-out retrospective tax measures."
Mr Scott-Hopkins added: "The Paymaster General, Dawn Primarolo, wanted to force pre-owned assets legislation through the Finance Bill without listening to reasoned arguments on exceptions. We are now faced with a muddle which will annoy middle England."

For advice on how to minimise inheritance tax, please complete the online enquiry form.

Your enquiry will be forwarded to specialist tax planning solicitor, Emma Guardern who can investigate ways of ensuring that as minimal amount of tax as possible is paid during your lifetime.

For further information about inheritance tax and other private client issues, please visit the firm's Private Client area.

 

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