The Government has recognised that the Inheritance Tax rules have become
overly complex over the years and as such the Chancellor has instructed the Office
of Tax Simplification (“OTS”), an independent organisation, to review and
consider the options for simplifying the Inheritance Tax rules and processes
with a view to making them both more coherent and easier to understand.
The OTS has recently published their second report on Inheritance Tax containing
11 recommendations concentrating on three key areas:-
- Lifetime gifting;
- The interaction between Inheritance Tax and Capital Gains Tax; and
- Businesses and farms.
The first big proposal of the OTS relates to lifetime gifting. There are presently an array of different gift exemptions, each with their own thresholds and their own set of rules, making the exemptions unnecessarily complex and administratively burdensome for individuals to understand. A lot of individuals are not aware of the different gift exemptions available and those that are aware do not always understand the rules correctly, which can result in issues and problems arising during both an individual’s lifetime and on their death.
Under current legislation, if you make a gift which does not fall within
one of the gift exemptions, you are required to survive 7 years from the date
you make the gift in order for the value of the gift to fall outside of your
estate for Inheritance Tax purposes. This period can increase to 14 years where
gifts have been made into a trust. This is deemed to be unduly cumbersome given
it can mean keeping records for up to 14 years and with most banks and building
societies not keeping records beyond 6 or 7 years, it can make the job of the
Executors extremely difficult when it comes to disclosing lifetime gifts to
HMRC on death.
In addition, where an individual survives more than 3 years but less
than 7 years from the date of the gift and the gift does become taxable for
Inheritance Tax purposes, taper relief must be considered.
The OTS has also considered who should be liable for the payment of
Inheritance Tax on lifetime gifts. At present, the liability falls on the
recipient of the lifetime gift.
The OTS has proposed the following solutions:-
- To replace
the various gift exemptions with an overall personal gift allowance
incorporating an increased lower threshold for small gifts;
- To reduce
the period in which gifts are taken into account from 7 years to 5 years and, to
balance this, abolish taper relief;
tax on lifetime gifts to be paid by the donor’s estate or from the recipient’s
share of the donor’s estate;
how the Nil Rate Band is allocated to gifts, from chronological order to a proportional
allocation across all gifts.
The interaction between Inheritance Tax and Capital Gains Tax
When an individual passes away, the individual inheriting the asset is
treated as acquiring the assets at date of death value rather than at the acquisition
value of the deceased. This is highly beneficial as it means that the
individual inheriting the asset can dispose of the asset soon after the deceased’s
death without incurring any Capital Gains Tax liability. In some instances, the
individual inheriting the asset can receive and dispose of the asset without the
payment of either Inheritance Tax or Capital Gains Tax.
The OTS is concerned that these rules stop individuals from passing on
their assets during their lifetime through fear of missing out on the valuable
Capital Gains Tax uplift.
In solution to this the OTS has proposed that the Capital Gains Tax
uplift be removed where a relief or exemption for Inheritance Tax applies so
that the individuals inherit the assets for Capital Gains Tax purposes at the
deceased’s historic base cost.
Businesses and Farms
Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”)
are two extremely valuable Inheritance Tax reliefs which are not to be wasted.
It is recognised that the reliefs were brought in to prevent the sale or break
up of businesses and farms where there is Inheritance Tax to pay following an owner’s
The concern here is that the requirements surrounding the “trading
activity” of the business for BPR are different and less favourable than the requirements
for gift holdover relief and entrepreneur’s relief. This makes it difficult for
business owners to make decisions as to whether to transfer their business
during their lifetime or on their death. In addition, the OTS recognised that
furnished holiday lets are not treated consistently.
The OTS has proposed the following solutions:-
- That the
level of “trading activity” for BPR be reviewed and be set at a lower level
than gift holdover relief or entrepreneurs relief;
- That the treatment
of indirect non-controlling holdings in trading companies be reviewed; and
- Consider aligning
the treatment of furnished holiday lets for Inheritance Tax purposes with the
treatment of furnished holiday lets for Income Tax and Capital Gains Tax.
In addition, the OTS has suggested looking at the following:-
- Classifying Limited Liability Partnerships in the same way as Limited Companies to ensure fair treatment when it comes to the BPR trading requirement;
- The eligibility of farmhouses for APR; and
- Clarity on how businesses or farms are valued.
Other areas of review
(a) Life Assurance
Under current regulations, if you have a life assurance policy, unless
it is written into trust, the policy will be subject to Inheritance Tax. The OTS has suggested removing the requirement
that the policy be written in trust to qualify for tax exemption.
(b) Pre-Owned Assets Tax (“POAT”)
POAT rules apply an income tax charge to gifts where the donor continues
to enjoy an indirect benefit. The report recommends a review of the POAT rules generally
to consider their function and whether they are still necessary given that they
are very complex and largely misunderstood.
The OTS has made a number of recommendations and proposals in the hope
that it will simplify the Inheritance Tax position. There are certainly some eye-catching
proposals; namely the amendment to the 7 year rule and removing the Capital
Gains Tax uplift where Inheritance Tax is not paid on death.
Some of the recommendations do appear sensible and are as expected,
however many practitioners had hoped that the report would tackle the matter of
the Residence Nil Rate Band which has been the subject of much criticism both
for its complexity and perceived unfairness. The report acknowledges the issues
raised by practitioners however, in view of its relatively recent introduction they
have determined that the relief will need to operate for a few more years
before they can accurately evaluate its effect.
We are yet to see if any of the recommendations will be implemented by
the government but at the recent Conservative Party Conference, the Chancellor Sajid
Javid revealed that he is considering whether Inheritance Tax, which is branded
as the “most hated tax”, should be scrapped altogether.
Labour has also recently reported on the scrapping of Inheritance Tax in
their Land for the Many policy paper. In that paper, they advocate that
Inheritance Tax should scrapped altogether and replaced with a lifetime gift
tax levied on the recipient.
Scrapping Inheritance Tax altogether would be enormously expensive for
the Treasury who collected receipts totalling £5.4bn last year but it is a
consideration for both the Conservative and Labour Party.
Whatever direction the government takes in the coming months it seems
that the rules on Inheritance tax will be subject to change in one form or
another. If you wish to discuss your personal situation then please contact one
of our team.
If you would like further information please contact Kerry Sawyer or Jeremy Duffy.
The contents of this newsletter are intended
as guidance for readers. It can be no substitute for specific advice.
Consequently we cannot accept responsibility for this information, errors or
matters affected by subsequent changes in the law, or the content of any
website referred to in this newsletter. © Mundays LLP