The View from No 50





November 2006

K P Bonney & Co

Chartered Accountants and

Chartered Tax Advisers

50 Cleasby Road  Menston

Ilkley  LS29 6JA

Tel:  01943 870933

Fax:  01943 870925







One budget change nobody foresaw was the change to the inheritance tax regime for trusts.  All of a sudden the goalposts are in a different place.


The change affects interest in possession trusts (sometimes called life interest trusts) and accumulation and maintenance trusts.


There are no changes to the inheritance tax treatment of bare trusts and discretionary trusts.


A detailed review of the changes is outside the scope of a newsletter like this.  But for those of you who are interested to learn more, I recommend a look at the briefing by Rawlinson and Hunter entitled “Trusts after the Finance Act 2006”.  A copy is attached to the email version of this newsletter.


Our Advice  If you have set up trusts of a kind affected by the changes or have arranged to set up such trusts (perhaps by writing trusts into wills) you must now review your arrangements.


Contact me for advice on your individual circumstances.




In enquiry cases it is normal practice for H M Revenue and Customs to contend that unexplained deposits are taxable receipts.  It can be difficult for the person under investigation to disprove this contention, particularly if they carry on a business.


The learning point is always to make a note of the origin of deposits and to do this at the time of receipt.  Even better, keep some hard evidence of their origin.


On this subject, I was amused to read a practitioner’s contribution to Taxation magazine earlier this year.   The practitioner had received a letter from H M Revenue & Customs concerning a civil engineering client.  To quote from the letter:


“It appears that one of the cheque deposits in the private account has not been included in the computation of sales.  This is a deposit of £x on 7 July 2003.  Please let me know the source of this deposit and forward supporting evidence.”


The practitioner handling the enquiry pointed out to readers that he himself was able to identify the source of the deposit.  He did not need to refer the question to his client.  By way of a clue as to its origin he was able to reveal that included in the deposit total was a supplement of £0.05.


For readers who miss the connection, the origin of the deposit was H M Revenue & Customs itself – a tax repayment!




Not so much cash in the attic as cash in the basement in this case.


A client rang me recently to ask if there would be any tax to pay on the sale of a vintage motorbike which had occupied a corner of the basement for the last twenty years.


I was pleased to be able to advise that any gain on the disposal of the motorbike would be exempt from tax.


But not every treasure retrieved from storage, dusted off and sold for a handsome profit will be exempt.


So which collectables are taxable and which are exempt?


As a starting point it is important to stress we are concerned here with objects owned for their own sake and not with objects bought for the purpose of selling on and not with objects used in a business.


Wasting assets


A gain made on the disposal of a wasting asset is exempt from capital gains tax.  A wasting asset is an asset having a predictable life of no more than fifty years.  An item of machinery is always regarded as a wasting asset regardless of the length of its predictable life.  That explains why the motorbike mentioned above is exempt.


Objects which are not wasting assets


A gain made on the disposal of an object which is not a wasting asset is exempt from capital gains tax provided the gross proceeds of sale do not exceed £6,000.


If the gross proceeds of sale do exceed £6,000 the gain is taxable, however, the gain is restricted to the lower of (a) the actual gain and (b) the excess of the proceeds over £6,000 multiplied by 5/3rds.


So those are the ground rules.  Here is how they apply to some examples.


Fine wine


Most wine is bought with a view to consumption within 50 hours let alone 50 years.  But where a fine wine is known to benefit from ageing for 50 years or more then a gain made on the sale of such wine would be taxable on the basis that it is not a wasting asset.  The gain might still escape taxation through a combination of the £6,000 rule for non wasting assets and the annual exemption.  An interesting debate with HMRC might then ensue as to whether the £6,000 rule applies per bottle or per case or to the whole lot.


Watches and clocks


Watches and clocks are pieces of machinery and as such are deemed to have a predictable life of less than fifty years.  Any gain on disposal is therefore exempt from capital gains tax.


Works of art


Some works of art will and some will not have a predictable life of more than fifty years.  Gains on those which do are taxable but are subject to the £6,000 rule.  Those that do not are exempt.




As part of an inheritance tax planning exercise, a mother transferred a building society account of hers into the names of herself and her two daughters.  She believed this removed two thirds of the balance in the account from her estate, subject to the normal rule about surviving a gift by seven years.


While she remained in reasonable health the mother managed the withdrawals from and the deposits into the account.  When her health failed her daughters took over the running of the account.  No attempt was made to allocate the deposits and withdrawals to the three account holders as that was not their intention.


Each named account holder declared one third of the account interest on their tax return.


When the mother died one third of the balance on the account was declared on her inheritance tax return.


The Revenue contended that the whole of the balance on the account was taxable.  First the mother had a ‘general power’ over the account.  She had the power to withdraw and use for her own purposes all of the funds in the account.  Second, there was a reservation of benefit.  The account was a single asset held by the three as joint tenants.  At the time of her death the mother was entitled to share in the account and the original gift of two thirds of the balance on the account had not been enjoyed by the daughters to the exclusion of their mother.


The Revenue’s arguments were upheld.


The family got their planning wrong here.


Each of the daughters, just like their mother, had the power to enjoy the money in the account.  It follows that whichever of them died first the entire account would have fallen to be counted as part of their estate for inheritance tax purposes.  The Revenue could have collected tax on the same asset several times over!


Our Advice  If you want to make an outright gift  then do so.  If you survive for seven years you avoid inheritance tax on the gift.


If you are more concerned to hang on to your savings but need help from your family with the conduct of your account, leave ownership of the account in your own name and make your offspring (or whoever) signatories rather than joint owners.




The manager sent his two centre halves on a team building course.  The course instructor gave them each a hunting rifle and sent them out to catch a wild animal.   After a while they came upon a pair of tracks.  They stopped and examined the tracks carefully.  The first centre half announced, “Those are deer tracks.  This is deer season, so we should follow the tracks and find our prey.”  The second centre half responded, “Those are clearly elk tracks, and elk are out of season.  If we follow your advice, we’ll waste the day.”  Each man believed himself to be the better woodsman.  Neither would concede.


They were still arguing when the train hit them.


Copyright:  K P Bonney & Co LLP 2006.  All rights reserved.  No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers.  Disclaimer:  The publishers have taken all due care in the preparation of this publication.  No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.

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