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by The Chancellor, a review of Inheritance Tax (IHT) by the Office of Tax Simplification (OTS) has suggested that outdated tax reliefs should be replaced with a single personal allowance of £13,000 a year.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:
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:
Gifting period and taper package
The government should, as a package:
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:
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.
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