Meg Saksida looks at the Office of Tax Simplification’s review of UK inheritance tax.
In January 2018, The Chancellor of the Exchequer tasked the Office of Tax Simplification (OTS) to review inheritance tax (IHT), and they responded with a two-part critique. Part one was published in late 2018, and the second (summarised below) in July 2019.
Angela Knight CBE (the Chairman of the OTS) said the current IHT rules are ‘both unpopular and complicated’, and the process is ‘complex and old fashioned’.
Lifetime gifting
Currently, there is a £3,000 annual allowance per UK individual to cover gifts made during the tax year. There is also an exemption made for gifts on the occasion of marriage. The suggestion from the OTS is to eliminate these ‘complex and…confus[ing]’ exemptions and replace them with one single ‘personal gifting allowance’.
Another exemption, for gifts out of income, which generally requires substantial records and other such evidence to be kept, is suggested to be either completely reformed or replaced; again, within the ‘personal gifting allowance’ described above.
Small gifts of up to £250 are currently exempt from IHT, but the OTS suggests that this level too should be reconsidered.
Seven-year period
Responses to the review have indicated that they feel the seven-year waiting period after which a lifetime gift may avoid IHT is too long. Records may become difficult to access, and due to taper relief (which can be up to 80%) there may be little fiscal benefit as the seven-year limit approaches.
The recommendation from the OTS is to reduce the seven-year period to five years and abolish taper relief altogether.
Payment of IHT
Currently, if an individual receives a gift and the donor dies within seven years of the transfer, it is the recipient that must pay any IHT due as a result of the gift on the death of the donor; not the donor’s estate. The allocation of the nil rate band is applied to gifts in chronological order. These concepts are not well understood. The OTS has suggested two alternative ways of changing the way the tax operates, and these would result in either a reform or an amendment to the current rules.
The ‘reform’ option would ensure that any IHT due on lifetime gifts should be payable by the estate, and the nil rate band should be first allocated proportionately across the total value of all the lifetime gifts. The ‘amendment’ option would have executors liable to IHT relating to lifetime gifts only out of assets they are responsible for, and which will be distributed to the recipient in question.
Capital gains tax
The OTS has found the interaction between IHT and capital gains tax (CGT) complex and indicated that it ‘can distort decision making’. Currently, there is a ‘free’ CGT uplift on death and IHT is charged instead.
The OTS’s recommendation is that where an asset is exempted from IHT, such as business or agricultural property, the CGT uplift should be removed and instead the recipient will have the asset’s base cost as the historic cost to the deceased.
Businesses and farms
Business and agricultural reliefs currently available exempt business property and agricultural land and buildings. The logic behind these generous reliefs is to prevent the sale or necessary break up of such businesses or farms to pay IHT.
The OTS suggests that the test for trading levels, etc., which are currently different for CGT purposes, should be standardised to simplify gifting decisions. Consideration is also being given as to whether the treatment of AIM-listed shares as business property is within the policy intent of business property relief.
Practical tip:
Ensure when planning for the future you consider the possibility of the IHT legislation changing.
