Overview

In the Pre-Budget Report of December 2003 the Chancellor Gordon Brown announced proposals to levy an Income Tax charge from 6th April 2005 in those circumstances where the transferor of an asset retains and interest or continues to benefit from that asset. In the instance of real property, the 'benefit' envisaged is the transferor continuing to reside in the property he/she has allegedly given away.

How the Charge Applies

The Government refer to such assets as 'pre-owned assets' and, broadly speaking, its intention is to tax the 'annual value' of such assets as a benefit-in-kind on the former owner still enjoying the use of the asset. The annual value on which the charge is based will be the open-market rental for a property or a fixed percentage of the capital value of most other assets to which the new charge applies. Any amounts which the transferor pays for the use of the asset - rent for example - will be deducted from the annual value in arriving at the taxable benefit.

The charge will also apply if a person provides the funds to purchase an asset which they go on to enjoy the benefit of after 5th April 2005.

Rationale Behind the Charge

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

The asset was gifted before 8th March 1986

The asset is owned by the transferor's spouse

The asset is, in fact, still caught by the 'Gifts with Reservation' rules and as such Inheritance Tax applies instead (hence, the 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 of the 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 of the 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 by the transferor, where necessary) does not exceed