Recently, the Office of Tax Simplification (OTS) published its second report, a review of and recommendations for the current Inheritance Tax (IHT) regime.
We should caveat, that the recommendations are not specific and more a “direction of travel”. 3 main areas were considered for simplification:
- Lifetime Gifts
- Interactions with Capital Gains Tax (CGT)
- Business and Farms in relation to Business Relief (BR) and Agricultural Property Relief (AR)
- Replace the annual gift exemption (£3,000 pa) 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, currently £250 pa
- Reform the exemption for normal expenditure out of surplus income or replace it with a higher personal gift allowance
Gifting and the Taper
- Reduce the 7 year period required for gifts to fall out of an individual’s estate, to 5 years. Therefore any gifts made 5 years before death are exempt from IHT
- Abolish Taper relief
Further to this, it is recommended that the government remove the need to take account of gifts made outside of the 7 year period when calculating IHT (this is known as the ’14 year rule’).
Liability for payment of IHT and the Nil Rate Band
- Simplifying and clarifying the rules on the liability for the payment of IHT due on lifetime gifts to individuals and following this, the allocation of the nil rate band.
Interactions with CGT
Where a relief or exemption from IHT applies, the government should consider removing the CGT uplift that individuals benefit from when someone dies. Currently the recipient’s acquisition cost is treated as the value at date of death. The new proposal is that the recipient would acquire the assets at the historic base cost. This would be the acquisition cost of the person who died.
Business and Farms – BR/AR
Amongst a number of proposals were:
- Consider whether to align the IHT treatment of furnished holiday lets with that of income tax and CGT, where the property is treated as trading, providing certain conditions are met
- Review the current approach around the eligibility of farmhouses for AR in sensitive cases, such as where a farmer needs to leave the farmhouse for medical treatment or to go into care.
- That death benefit payments from term life insurance products are free of IHT on the death of the life assured, without the need for the plans to be written into trust.
- Review the Pre-Owned Asset Tax (POAT) rules and its interaction with other IHT anti-avoidance legislation. The aim of this is to consider whether they function as intended and whether they are still necessary or not.
There is no doubt that current IHT framework is very complicated, with many different aspects and interactions. At Eldon we will continue to monitor further updates surrounding not just this, but all tax and legislative changes that may have an effect on the financial planning that we undertake. We will of course continue to refer matters to specialist solicitors and accountants as required.