British investors who have real estate placed in a trust through a life policy will now have to pay ...
British investors who have real estate placed in a trust through a life policy will now have to pay 5% of the value yearly, according to announcements made by UK's Inland Revenue on Pre-Owned Assets Tax (Poat).
The regulations are likely to impact investors who have more than £100,000 in these types of trusts and receive benefits of £5,000 a year or more. It is probable it will effect thousands of investors.
Gerry Brown, technical manager for Scottish Life International, said: "The proposals discriminate against those trust arrangements that use life assurance policies as the underlying investment.
"Where the trust asset is a house, the legislation will require tax to be charged on the open market rental value each year. However, that rental value need only be established every five years and such a value will not be increased between quinquennial valuations to reflect house price inflation, currently in excess of 10% annually.
"In contrast, a life policy must be revalued every year and tax paid on 5% of the value.
"Many of the submissions made to the Revenue, as part of the consultation process, had argued that a valuation rate not exceeding 2% of the policy value would be appropriate. In most trust arrangements using life policies, the individual establishing the trust has no right to receive payments from the trustees but instead must rely on the trustees' discretion. On the other hand, where the trust owns a house in which the individual lives, the individual has a tangible benefit - the right to reside there."
According to Brown, investors should transfer holdings out of the trust or place them into a new one to avoid the Poat charge. For example, investors might be able to use the 5% withdrawal limit depending on circumstances.
Otherwise, the trustees could reduce the value of the trust below £100,000 by paying money out to the beneficiaries. However, this could be subject to income tax if there is a partial surrender.
Another method is to convert the existing trust into a child trust and exclude their benefits.
In a separate development, PriceWaterhouseCoopers (PWC) has called for the UK government to delay the introduction of the Poat, saying that the complete lack of technical guidance given to tax experts has made it impossible for them to prepare for the introduction of the tax this month.
Clive Mackintosh, tax partner at PWC, said: "Despite coming into effect on 6 April, the Revenue has still not published the long-awaited detailed guidance as to how it believes the tax should work. I would like to see the introduction of the charge delayed for a year in order to give people time to understand what the impact of the legislation is in detail."
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Reporting to Steve Hill
Appointed on 19 September