The Office of Tax Simplification (OTS) published its second report into simplifying the current inheritance tax (IHT) regime in July this year.
The report provides a number of recommendations to make the IHT regime simpler, more intuitive and easier to operate. The recommendations cover three key areas:
- lifetime gifts and the liability for paying tax due on such gifts;
- the interaction between IHT and capital gains tax (CGT); and
- businesses and farms.
The main suggestions in connection with lifetime gifts include:
- replacing the various lifetime gift exemptions which currently exist with a personal gifts allowance;
- reducing the seven year period during which a lifetime gift may become subject to IHT to a five year period;
- abolishing taper relief;
- removing the need to take account, in some cases, of gifts made up to seven years before the current seven year period ;
- simplifying and clarifying the rules on IHT liabilities for lifetime gifts that are not survived for seven years by the donor; and
- reforming the exemption for normal expenditure out of income.
The main recommendation regarding the interaction of IHT and CGT is removing the CGT uplift to probate value on death where a relief from IHT applies, with the recipient instead acquiring the asset at the historic base cost of the deceased.
For businesses and farms, the main suggestion is considering whether it is appropriate for the level of trading activity required for business property relief (BPR) to be available to be brought in line with CGT reliefs such as holdover relief or entrepreneurs’ relief, which include a requirement that broadly 80 per cent of the business relates to trading activity .
Some of the recommendations will simplify the current IHT regime, particularly the suggested changes in relation to lifetime giving. Reducing the seven year survivorship period to five years for lifetime gifts will allow lifetime gifts to become exempt from IHT quicker than is currently the case. This change will also reduce the administrative burden currently placed on executors to obtain details of lifetime gifts made by the deceased, in some cases up to 14 years before death.
Replacing the current lifetime gift exemptions with a personal gifts allowance is also positive, given that the level of many exemptions have not increased in almost four decades. This assumes that any personal gifts exemption will be set at a reasonable level. But the potential replacement of the normal expenditure out of income exemption with what may, for some, be a less generous enhancement to the proposed personal gifts allowance could prove costly to some taxpayers.
The report’s recommendations for changes to the interaction between IHT and CGT are significant, particularly for business owners and farmers. The proposed changes would remove the current incentive to wait until death before transferring a business to the next generation and better encourage lifetime giving of APR and BPR qualifying assets.
What should you do?
Whether the OTS recommendations will be enacted by Parliament remains to be seen. Nevertheless, the OTS report is a timely reminder to consider your current potential exposure to IHT and the actions that could be taken now to mitigate this.
For more information please get in touch with Matthew Brown.