Scottish Life international warns investors could be hit by new legislation
Investors who hold discounted gift trusts and loan trusts could next become the latest victims of UK's pre-owned asset tax, which imposes an income tax on people who give away assets but continue to use them.
Scottish Life International (SLI) has warned that many aspects of the new income tax charge on pre-owned assets remain unresolved despite the fact that the legislation received final parliamentary approval last month.
Gerry Brown, technical marketing manager at SLI, said: "Ideally all tax legislation should be drafted in such a way as to be easily understood by those affected and their professional advisers. Unfortunately the pre-owned asset tax legislation fails to meet this criterion. There is still considerable confusion as to the operation of this new tax.
"There are many situations where tax avoidance is not a motive, including availability of inter-spouse exemption for intangible assets and partnership/shareholder protection arrangements."
In addition, there are some scenarios where stated government policy is that the tax will not apply but the necessary legislative amendments have not, as yet, been made. These include discounted gift arrangements and loan trusts.
For example, a loan trust is created with a lump sum which is provided in the form of an interest free loan to the trustees, which is repayable on demand. Brown warns the Inland Revenue might impose a pre-owned asset tax charge as the repayment may be deemed a benefit.
In a discounted gift trust an individual gifts a policy to nominated beneficiaries. Brown warns if the individual enjoys a repayment stream from the policy this could be classified as a benefit and could potentially trigger a pre-owned asset tax charge.
Originally the Revenue stated that discounted gift scheme such as the SLI Secure Estate Plan will not trigger a pre-owned asset tax charge.
Potential users and their intermediaries are in limbo - without certainty as to the practical application of the legislation, financial planning becomes a lottery.
Brown added: "The Revenue should publish a statement of practice covering the issues raised by various professional and industry bodies. While this would not be an ideal solution, it would at least provide some guidance for intermediaries."
Schemes that have already have been targeted under the new legislation include the Clerical Medical Family Wealth Trust and the Scottish Equitable Plus Trust. Investors who held these types of trusts could be left to pay thousands of pounds in tax.
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