The tax charge on arrangements whereby a person continues to enjoy a benefit from assets he previously owned but has now passed to another was brought in by the 2004 Finance Act and catches all such arrangements made on or after 18 March 1986. However, you can elect for the tax rules relating to gifts with reservation of benefit to apply instead, which in some circumstances may be beneficial, provided this option is exercised before 31 January 2007.
Under the rules the basis of the charge to tax will be:
· for land – the rental value of the land less any contribution received by the landowner from the occupier under a legal agreement;
· for intangible property – the deemed interest on the value of the property less any income tax or capital gains tax paid by the settlor; and
· for assets generally – the deemed loan interest applicable to a loan of the value of the assets settled.
Where deemed loan interest is the basis of charge, this will be at the rates set from time to time by HM Revenue and Customs.
There are, however, exceptions to the rules in addition to the 'de minimus' rule which exempts small gifts into settlement. The main ones are:
· disposals at arm's length or where a market rent is paid;
· gifts into trust in which the settlor retains an interest in possession;
· transfers to spouses; and
· transfers that stay within the settlor's estate for Inheritance Tax (IHT) purposes by virtue of the settlor retaining an interest.