Monday, January 07, 2008

Differences in tax regimes between Scotland & England may emerge

Using among other comparisons, the tricky subject of Inheritance Tax & Wills, the Scotsman reports on differences or loopholes in 'cross border taxes' which may emerge north of the border ...

Watch for loopholes in cross-border tax


INHERITANCE tax can be a complex subject and, when applied to the specialities of Scots law, it becomes even more intricate.

The establishment of the Scottish Parliament and its subsequent legislation has extended the potential for differing tax treatment between Scotland and the rest of the UK.

Although the Scottish Parliament has no influence over UK tax legislation (other than to raise or reduce the basic rate of income tax by 3 per cent), it can legislate on general law, which in turn can have an indirect impact on taxpayers north of the border. Examples include the law of the land, the law of families and the definition of charity.

The constitutional principle is that UK tax law should be applied on both sides of the border in an equivalent manner. However, its interpretation in Scotland is not the same as in England and Wales.

For example, the different land laws mean that although a buyer can purchase a farm in England and a farm in Scotland on the same day, they will be treated differently for inheritance tax purposes, as the date of acquisition in Scotland is deemed to be the date of registration of the title, whereas in England and Wales the date of settlement is used.

And as agricultural relief from inheritance tax is available to owners following the second anniversary (or in some cases the seventh anniversary) of ownership, the differing legal acquisition dates have an impact on when inheritance tax relief becomes available.

Agricultural relief significantly reduces the amount of inheritance tax due, and can often eliminate it altogether. It is interesting to note that many wealthy investors choose to purchase land in order to protect their estate from inheritance tax when they die. Research shows that 36 per cent of farm buyers in 2007 cited inheritance tax planning as a reason for their purchase.

Scots law also has different principles for wills. In Scotland, neither marriage, divorce, entering or dissolving a civil partnership, nor the birth of a child revokes a will, but the rights in Scots law of spouses, civil partners and children have inheritance tax implications.

Additionally, following the Family Law (Scotland) Act 2006 cohabitees have a right, within six months of a death, to make a claim on an estate where there is no will. As the inheritance tax exemption for spouses and civil partners does not extend to cohabitees there may be inheritance tax consequences.

Charities law provides another robust example of the distinct workings between Scots law and inheritance tax as it generates major issues. The Charities & Trustee Investment (Scotland) Act 2005 defines a list of Scottish charitable purposes (these are different, though similar, to those defined in English and Welsh law).

However, to be guaranteed the usual tax exemptions (except for rates, which are a devolved matter), Scottish charities must fall within the charitable purposes as defined by English and Welsh law, not Scots law.

As a result, there may be charities that fall under the remit of the Office of the Scottish Charity Regulator, but which do not qualify for the tax exemptions. Gifts or bequests to such charities will therefore be subject to inheritance tax.

Elsewhere, the rules under Scots law for establishing the order of death (for example in a joint accident), or to have someone presumed dead if they have gone missing or been in an accident also vary from those elsewhere in the UK, and extra care should be taken when considering the inheritance tax position.

Charity and succession matters, wills and trusts are just a few of the many intricacies that overlap in the interpretation of Scots law and inheritance tax, and thus result in differing treatments in Scotland than the rest of the UK for inheritance tax purposes.

It is a multifaceted issue that, combined with the activity of the Scottish Parliament, raises serious questions and challenges for the Scottish legal profession.

• Bill Pagan and Fiona McDonald are solicitors at Pagan Osborne. They are the authors of Inheritance Tax In Scotland 2007/08, which provides an overview of how the specialities of Scots Law and the intricacies of inheritance tax overlap.

The full article contains 698 words and appears in The Scotsman newspaper.
Last Updated: 06 January 2008 6:12 PM

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