CIOT welcomes late elections rule

Budget notice 28 states that HM Revenue & Customs (HMRC) will be able to accept late elections to pay inheritance tax rather than a pre-owned asset tax (POAT).

The exact terms on which HMRC will accept late elections have yet to be announced, but this measure is a good outcome to discussions with HMRC held over the past year by The Chartered Institute of Taxation (CIOT).

Emma Chamberlain, Chair of the CIOT’s Capital Taxes Sub-Committee, says: “POAT is a complicated tax and people may not realise that they are caught by it. For example, it can apply if you sell a share in your house to a relative even though no inheritance tax is saved. It can also affect those whose estate is under the inheritance tax threshold of £285,000 and therefore don’t pay inheritance tax at all because the limits for POAT are different. The change allows such people to make a late election once they become aware of the POAT problem. However, it does not deal with the overall problem that POAT is potentially a very unfair tax in that it can catch all sorts of people who have done no inheritance tax planning at all. Unfortunately nothing has been done to deal with these anomalies and ensure the tax is more targeted at stopping inheritance tax avoidance.”

The Finance Act 2004 introduced an income tax charge from April 2005 on any benefit that people derive from having free or low-cost enjoyment of assets which they formerly owned or provided the funds to purchase. This was intended to be an anti-avoidance measure but became horribly complex. It was mainly aimed at inheritance tax schemes on the family home to stop people from giving away their home whilst continuing to live there.

When it was introduced on 6 April 2005, it was heavily criticised for being poorly targeted. The Government’s answer was that if taxpayers were unwittingly caught by the rule, they could “elect” to pay inheritance tax on their death instead.

Many others faced problems because certain obscure changes in the last Budget left people in the dark about whether or not they needed to make an election, even if no inheritance tax was actually being saved. In addition, a last minute change by HMRC on 29 January 2007 in the interpretation of certain rules governing a scheme on the family home called the reversionary lease scheme meant that many people who thought they were outside POAT altogether suddenly found they needed to make an election to avoid paying POAT. Finally it emerged that HMRC had not introduced the proper statutory regulation which was required if people were to make elections that were valid anyway!

Robin Williamson, Technical Director of the CIOT’S Low Incomes Tax Reform Group, comments: “The news that HMRC will be allowed to accept late elections will particularly benefit those who may have done something unawares to attract the operation of this tax. Some of them may have been on quite low incomes and unable to afford the annual charge. Without this measure, substantial arrears of tax might have been demanded of them when their liability to the charge was identified.”

Legislation announced today will mean that HMRC can in certain circumstances accept elections made after 31 January 2007.

Emma Chamberlain explains: “The new rule will be most useful for those people who find themselves inadvertently caught by POAT even though they did not intend to do any inheritance tax planning. For example, a mother who gave some cash to help her son buy a house and then later moved into the house with him might be caught by the income tax charge without knowing this. Similarly, families who sell a share in the house to each other are caught by POAT even though no inheritance tax is saved. Such people will now be able to elect late although it is likely that they will still need to elect within a reasonable time of becoming aware of the need to do so.”

Notes to Editors

Since POAT is payable where the value of an asset exceeds, roughly, £100,000, and inheritance tax does not begin to be payable until a person’s estate exceeds £300,000 (in 2007-08), it is clearly advantageous for those whose estates are valued at between those figures to make the election. In addition, the inheritance tax in this case would be payable on death, while POAT is an annual tax on income while the taxable person is still living.

The law prescribes a time limit for making the election – 31 January following the tax year in which the charge arose. This means that, for a charge first arising in 2005-06, 31 January 2007 was meant to be the last date by which a person could opt into inheritance tax instead of paying POAT.

The Chartered Institute of Taxation (CIOT) is a registered charity (number 1037771) and is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT deals with all aspects of direct and indirect taxation. Its primary purpose is to promote education in and the study of the administration and practice of taxation. One of its key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities. The CIOT’s comments and recommendations on tax issues are made solely in order to achieve its aims: it is entirely apolitical in its work. The 14,000 members of the CIOT have the practising title of ‘Chartered Tax Adviser’.

The Institute was established in 1930 and received its Royal Charter in 1994. It is a United Kingdom member of the Confédération Fiscale Européenne (CFE), the umbrella body for 150,000 tax advisers in Europe. As part of its charitable activities, the CIOT also sponsors the Low Incomes Tax Reform Group that works to improve and simplify the tax system so as to make it more responsive to the needs of those who cannot afford to pay for tax advice. The Institute offers the Advanced Diploma in International Taxation as a specialist qualification for international tax practitioners primarily working in corporate tax.

The Low Incomes Tax Reform Group is an initiative of the CIOT which gives a voice to those who cannot afford to pay for help with tax and tax credits.