Inheritance Tax rules up for change

In a report commissioned by The Chancellor, a review of Inheritance Tax (IHT) by the Office of Tax Simplification (OTS) has suggested that outdated tax reliefs should be replaced with a single personal allowance of £13,000 a year.

In total the report makes 11 recommendations which concentrate on (a) lifetime gifts (b) interaction with Capital Gains and (c) Businesses and Farms. Further recommendations are: 

• The 7 year rule is reduced to 5 and “tapering” between 3 and 7 years is abolished
• Where a relief or exemption from IHT would apply on death (i.e. Business Property Relief (BPR), Agricultural Property Relief (APR), spousal exemption), the capital gains tax uplift on death should be removed and the recipient treated as acquiring the assets at the deceased’s historic base cost
• Align the IHT and Capital Gains Tax (CGT) tests for business reliefs as, currently, the level of trading activity for BPR to apply is different to the comparable conditions for CGT (entrepreneurs and holdover reliefs)
• Align the IHT treatment of furnished holiday letting with that of Income Tax (IT) and CGT
• Review the treatment of Limited Liability Partnerships
• Review HMRC’s current approach to APR in certain cases , i.e. where the farmer needs to leave the farmhouse for medical treatment or to go into care
• Treat death benefits from term life insurance as IHT free on death without the need for them to be written in trust
• Review the Previously Owned Asset Tax (POAT) rules and their interaction with other IHT anti-avoidance legislation to establish if they’re still necessary

Residence Nil Rate Band
No recommendations were made about the Residence Nil Rate Band which was introduced in April 2017 despite the fact it is frequently criticised because it disadvantages those who do not have children and is perceived as unfair. As it was only introduced in April 2017, the OTS believes more time is needed to evaluate its effectiveness before recommendations can be made about simplification

Trusts and charities
As regards Trusts, HMRC has recently been consulted on the changes to the taxation of trusts and suggestions have been put forward for the government to consider in the context of that broader consultation

No recommendations have been made as regards Charities, and the reduced 36% that applies where a person leaves 10% or more of their net Estate to charity, because it has only recently been introduced and will take time to fully embed itself 

Fundamental review
No fundamental review of IHT has taken place, for instance whether or not IHT is the right way to collect tax on death, but simplification of the current complex system, requiring mountains of paperwork and up to 20+ forms, is to be welcomed.

However, in today’s uncertain political environment, whether or not these recommendations will ever be taken up is not known, especially as a report commissioned by the Labour Party suggests a radical reform to IHT which would impose one lifetime allowance and any excess chargeable to IHT 

Summary of Recommendations

Key area 1: Lifetime gifts

Gift exemptions package
The government should, as a package:

• replace the annual gift exemption and the exemption for gifts in consideration of marriage or civil partnership with an overall personal gifts allowance
• consider the level of this allowance and reconsider the level of the small gifts exemption
• reform the exemption for normal expenditure out of income or replace it with a higher personal gift allowance

Gifting period and taper package

The government should, as a package:

• reduce the 7-year period to 5 years, so that gifts to individuals made more than 5 years before death are exempt from Inheritance Tax, and
• abolish taper relief
• The government should remove the need to take account of gifts made outside of the 7-year period when calculating the Inheritance Tax due (under what is known as the ’14 year rule’).

Liability for payment and the nil rate band
The government should explore options for simplifying and clarifying the rules on liability for the payment of tax on lifetime gifts to individuals and the allocation of the nil rate band.

Key area 2: Interactions with Capital Gains Tax
Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.

Key area 3: Businesses and Farms APR/BPR
The government should, as a package:

• consider whether it continues to be appropriate for the level of trading activity for BPR to be set at a lower level than that for gift holdover relief or entrepreneurs’ relief
• review the treatment of indirect non-controlling holdings in trading companies, and
• consider whether to align the Inheritance Tax treatment of furnished holiday lets with that of Income Tax and Capital Gains Tax, where they are treated as trading providing that certain conditions are met
• The government should review the treatment of limited liability partnerships to ensure that they are treated appropriately for the purposes of the BPR trading requirement.

HMRC should review their current approach around the eligibility of farmhouses for APR in sensitive cases, such as where a famer needs to leave the farmhouse for medical treatment or go into care.

HMRC should be clearer in their guidance as to when a valuation of a business or farm is required and, if it is required, whether this needs to be a formal valuation or an estimate.

Other areas of Inheritance Tax
The government should consider ensuring that death benefit payments from term life insurance are Inheritance Tax free on the death of the life assured without the need for them to be written in trust.
 
The government should review the POAT rules and their interaction with other Inheritance Tax anti-avoidance legislation to consider whether they function as intended and whether they are still necessary.

Contact us
If you would like any help or assistance with Inheritance Tax Planning or Probate, contact Olivia Down.