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New 'Stealth Tax' put in place
8/02/2007

Britain`s business community and army of small-scale investors are being advised to put their financial affairs in order immediately to avoid being stung by a possible new inheritance ëstealth` tax.

It is feared that Gordon Brown may attempt to generate tens of millions of pounds in extra revenue for the Exchequer by amending the rules on Business Property Relief (BPR) in his next Budget.

BPR allows businessmen and women to claim 100% relief from inheritance tax on shareholdings which they have held for two or more years in private trading companies shares that they give away during lifetime or bequeath by will.

It also applies to those individuals who have held shares in qualifying companies listed on the Alternative Investment Market (AIM), including many people with relatively small investments.

But estate planning specialists believe the Chancellor could cut BPR to 50% in many cases as part of a new initiative to increase the £3.3 billion currently raised by inheritance taxes.

Richard Bate, a partner with leading law firm Brabners Chaffe Street, said: `There has been intense speculation that the Exchequer would like to increase income from inheritance tax and, if so, how that would be achieved. A tightening of the rules in relation to BPR would be a lucrative move.

`The Chancellor would not even necessarily have to flag it up before his Budget speech. He could introduce it with immediate effect in March. If individuals liable to be affected haven`t already taken measures to address the issue, there could be significant impact.î

Unexpected changes to inheritance tax rules are not without precedent under the current Government. In March last year, without prior warning, the Chancellor fundamentally changed the taxation of trusts, introducing a 20% charge on the creation of lifetime trusts with an additional 6% levy every 10 years and on withdrawing funds.

The previous April there had been another change - the introduction of Pre-Owned Asset tax ñ which clawed back tax from individuals who had attempted to avoid inheritance tax by continuing to use assets which they had previously given away. It had been introduced as part of the 2004 Finance Act and had retroactive effect.

Particular concern has been voiced about how any change to BPR could affect AIM-listed shares. Older investors have been particularly keen to buy up AIM shares in recent years because they are able to avoid inheritance tax after two years - far earlier than by using traditional investments such as trusts or gifts.

But experts such as Mr Bate say that the potential negative impact on private businesses and AIM stocks might yet dissuade Gordon Brown from reducing BPR. He added: `The alternative might be for the Chancellor to increase the rate of inheritance tax on trusts further or to make it more difficult to make lifetime gifts generally. Either way, there is a clear need for people with assets which might be affected to take action promptly in order to avoid losing out in March.î


For further information contact Richard Bate at Brabners Chaffe Street on 0161 836 8800

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