25 September 2019
Changes on the horizon for Inheritance Tax?
The Office of Tax Simplification (“OTS”), the independent body tasked by the government with simplifying the tax system, has issued a report recommending a number of changes to the Inheritance Tax (“IHT”) system. The Government is now considering the report.
The most important recommendations cover four broad areas:
- Lifetime Gifts;
- Interaction of IHT with Capital Gains Tax (“CGT”);
- Life Assurance Policies; and
- Business Relief
The current annual exemption for gifting is £3,000 per tax year, this limit has not changed since 1980. The OTS is therefore proposing that the Government should increase this level to a higher figure to be determined.
There is another proposal to reform the way in which ‘expenditure out of income’ rules can be used to reduce your IHT bill. Regular and normal payments out of income to individuals is not considered a form of gifting, but the issue becomes complicated when it is difficult to establish what is ‘normal’ and ‘regular’ expenditure. The suggestion is therefore to abolish the rule, and replace it was a simpler freedom to use a certain percentage of one’s income towards gifting.
The most intriguing proposal is the suggestion to change the seven year gifting rule (in which a person must survive a gift by seven years to avoid paying inheritance tax on it) to a five year gifting rule. The statistics suggest that only one in five estates declare lifetime gifts made in the seven years before death, half of which are for gifts made more than five years before death, generating revenue of a mere 0.15% of the total tax pool for IHT.
In order to avoid any loss of revenue, taper relief (which reduces the IHT bill on gifts, depending on the number of years elapsing from the date of the gift) would however be abolished. This would be a deterrent to those planning on making significant gifts later in life.
Interaction of IHT and CGT
The OTS did not recommend major changes to the interaction of IHT and CGT but did suggest that where assets are passed from one spouse (“A”) to the other (“B”) on death, B should acquire those assets at the same value that A acquired them. This would result in a potential CGT bill for B if they sold/gave away assets they inherited from A. Now, when someone dies, the CGT ‘base’ value is reset. But when a person leaves assets to their spouse under the Will (which means there is no IHT to pay) the OTS thinks it would be appropriate for that spouse to acquire those assets at the same value that the predeceasing spouse acquired them.
Life Assurance Policies
The OTS has recommended that life polices, however they are set up, should be treated as IHT exempt on the death of the life assured. This would be good news for those with life polices where the benefit pays out to the estate.
If you die owning business assets (such as shares in a private limited company, or shares owned on the Alternative Investment Market (AIM)) Business Relief may be available. Business Relief allows an estate to potentially qualify for 100% exemption from inheritance tax on the value of the business assets. Some critics view this exemption as overly generous tax break for businesses. While the OTS recognises the potential loss to the Revenue from this relief, it does not believe the benefits outweigh the potential consequences to business. Instead the OTS is looking to target specific elements of the relief, such as the exemption for AIM listed shares; and whether the definition of a trading company is tight enough.