Inheritance tax trap for pensioners

New inheritance tax rules that were designed to clamp down on wealthy tax avoiders are more likely to trap middle income pensioners who want to unlock some of the cash in their homes to boost their pensions, according to a London law firm.

Increasing numbers of elderly homeowners are unexpectedly falling into the inheritance tax trap thanks to the sharp rise in house prices over recent years. Those who want to sell a share of their property to their children or other relative while they are alive in return for a cash payment, as many elderly homeowners do without any tax avoidance motive, may now be forced to turn to expensive bank or insurance company equity-release schemes instead.

Robert Brodrick, senior solicitor at Trowers and Hamlins, says: 'The new Pre-owned Asset Rules mean that elderly homeowners who want to use some of the equity in their homes to support themselves in their old age will risk an income tax charge if they want to continue living in the property and not let it pass to the scheme provider on their death.'

Anyone who has sold a portion of their home since 7 March, or who does so in the future, may be affected by the changes in the rules. Brodrick says: 'The Inland Revenue says they will be subject to an income tax charge on the perceived benefit of living in the share of the property if the rental value of this share exceeds £5,000 a year. It is less well-off pensioners, unable to pay the income tax charge, who will suffer most from this legislation.'

Children could gift money instead but this can also be problematic. Brodrick says: 'One child might give the parents the money but there may be other offspring who would benefit equally from inheriting the property on death. The parents could change their will to reflect this, but why should they?'

Charity stays at home


Charity seems to begin at home for most Britons who would prefer their children or grandchildren to benefit from their wealth on death, rather than good causes, according to new research.

Insurance firm Axa found that 63 per cent of working people and 74 per cent of pensioners want to leave money to their children but those figures drop to 8 per cent and 9 per cent for those intending to leave their money to charity.

Britons are among the least charitable nationalities, with 40 per cent of Singaporeans and 31 per cent of Americans in work planning to leave something to charity.

Axa also reveals the percentage of people with wills totals 37 per cent of working Brits and 71 per cent of pensioners, compared with 61 per cent and 94 per cent in Australia.

Rule changes may fuel boom


Could the share-owning democracy envisaged by the Tories in the 1980s turn into a nation of landlords under New Labour? It's possible given the new generous tax breaks from April 2006 on holding residential property in a pension.

Pension investors will be allowed to invest in residential property for the first time, potentially reinvigorating the buy-to-let market. The April issue of Money Observer examines the potential profits and pitfalls associated with the new rules.

The magazine also comes with a free supplement on investment trusts, revealing the 10 best for your Isa; explains how investment trusts differ from unit trusts; and examines the tax breaks that are breathing new life into venture capital trusts. There is also advice on how to fine-tune your Isa portfolio, invest wisely for children and reduce inheritance tax on your estate.

The April issue of Money Observer is on sale now at high street branches of WH Smith and all good newsagents. For details of Money Observer's free three-month trial subscription, call 0870 870 1324 or visit www. money observer.com (quoting ref: MTDL001).

Lassie saves again


The US firm that insured canine Hollywood star Lassie is launching in the UK with a range of unit-linked investment bonds targeted at long-term human investors.

Connecticut-based investment group The Hartford, which also insured the home of president Abraham Lincoln, is selling a range of bonds through UK independent financial advisers that match different investment risks ranging from cautious to adventurous, as well as a self-select option.

As with any investment bond, investors can withdraw 5 per cent a year without penalty but if they withdraw more in the early years, they will face high penalties: from 6.25 per cent in the first year tapering down to 1.25 per cent in the fourth. Annual management charges are 1.82-2.51 per cent.