The Office of Tax Simplification (OTS) has recently released its second report following its review into avenues to simplify Inheritance Tax (IHT). As anyone who has had the pleasure of dealing with the complexities of IHT –in their own lifetime or after the death of a loved one – will know, it is not easy to navigate the various reliefs, allowances and exemptions to ensure tax efficiency.
IHT has undergone many changes since it was introduced. It was originally implemented to target a specific area and, rather than a new system being developed as additional aspects were brought into the scope of IHT, the original system has had piecemeal legislation bolted on to bridge the gaps. The result is an IHT system that is very difficult to navigate, meaning beneficial allowances and reliefs are often unobtainable by the ill-advised and many aspects are left entirely unfit for purpose.
The changes suggested in the OTS report range from amendments to make the current system simpler, in the case of lifetime giving, to a complete shake up of the current rules, where the tax-free uplift for capital gains tax on death is abolished completely.
Of course, the introduction of a new Government could see the OTS report shelved completely, so it is important that individuals do the best they can with the state of current affairs. Which means delving into the existing, complex, Inheritance Tax system.
Making gifts to next generations has always been highly regarded as a tax efficient method of passing wealth on. Unfortunately, the asset rich, cash poor financial situation many families find themselves in makes lifetime giving near impossible. There are few situations where gifting the family home can be beneficial for tax purposes, but these situations do exist. A qualified adviser will be able to confirm if there are any ways in which you can make gifts and pass wealth on during your lifetime even if making cash gifts isn't available to you.
Inheritance Tax Reliefs
£1million passed on by a married couple (or a couple in a civil partnership) is a headlining IHT break brought in by David Cameron's Government. However, when you look at the application of the Residence Nil Rate Band (RNRB) there is an array of technicalities to consider. Whilst many families should be able to benefit, passing assets on in the wrong order or the implementation of some trust structures could stop the relief in its tracks.
Certain assets lend themselves to Inheritance Tax reliefs, namely business property (Business Property Relief (BPR)) and agricultural property (Agricultural Property Relief (APR)). However, you don't need to be a self-employed farmer to benefit from the reliefs which can see 50 to 100 per cent of the value of the asset exempted from IHT.
The RNRB alone could see a potential £140,000 reduction in IHT for a married couple with a full allowance.
Lifetime giving can seem like a great idea, until the interactions with the other taxes are considered. Gifts of anything other than cash during lifetime may incur a sizeable Capital Gains Tax (CGT) bill where a 'dry tax charge' is payable. Without proper advice you could find yourself paying tax on the disposal of an asset that you haven’t had any cash for – with no money to foot the bill.
As with all things tax, a qualified adviser is invaluable in helping you make informed decisions for yourself and the future generations of your family.