Chapter: 2 - Inheritance Tax Mitigation: The Basics

Anti-avoidance

2.1.8

With the introduction of IHT in 1986 came the ‘reservation of benefit’ or ‘GWR’ rules, inherited from Estate Duty (FA 1986 s102 and Sch 20).  In broad terms, if when a person dies he is enjoying a benefit from something he has given away since 18 March 1986, that asset is treated as forming part of his chargeable estate.  If the benefit ceased during his lifetime he is treated as having made a PET, so that if more than seven years elapsed after the cessation of benefit there are no IHT implications.  If the benefit ceased within the seven years before his death, it is treated as a chargeable lifetime transfer.  See 3.2.2.

Following well-publicised successful attempts by taxpayers to devise ways around the GWR regime, such that they would continue to enjoy the benefit of the gift while having made an effective transfer for IHT purposes, the draconian pre-owned assets (‘POA’) regime was introduced from 2005/06 (FA 2004 Sch 15).  The charge applies where (subject to certain exclusions) a person enjoys some benefit from land or chattels which he has given away and which do not form part of his estate either under general principles or under the GWR rules.  In that case, subject to an annual de minimis of £5,000 of value per taxpayer, the value of the benefit attracts Income Tax each year.  A POA charge also arises where an intangible asset (eg cash or shares) is comprised in a settlor-interested trust.  There is then an annual Income Tax charge on 6.25% (for 2008/09) or 4.75% (for 2009/10) of the market value of the trust property.  See 3.2.3 for more detail.