investment taxation

Posted by ianpascall - August 21, 2019 11:45 am Inheritance Tax – all change?

The Office of Tax Simplification has completed its review of a wide range of administrative and technical aspects of Inheritance Tax (IHT).  It’s second report was published on 8 July 2019.

The OTS can only recommend changes to the Chancellor, but the IHT rules are outdated, complex and seen by many as being ripe for reform.

What are the OTS’s recommendations?

Some of the recommendations are:

  • The OTS has suggested that the various small gifts exemptions that are currently available should be replaced with a single, but higher, personal gifts allowance. This would simplify record keeping and bring much needed clarity.
  • That exemption for regular gifts out of an individual’s “surplus” income should end. This could restrict amounts of regular “exempt” gifts an individual could make, particularly for those using their surplus income to make substantial regular gifts.
  • Currently lifetime gifts (not otherwise exempted) are regarded as being “potentially exempt” because if the donor survives 7 years from the date of making the gift, the value falls outside their estate for IHT purposes. If the donor survives at least 3 years, a taper relief reduces the IHT charge on death. The OTS proposes that the 7 year period be reduced to 5 years and that the taper relief be abolished.
  • Business Property Relief (BPR) is a valuable relief that can give 100% IHT relief for trading assets. The OTS proposes that the definition of a “trading company” be amended. Generally, this will mean that the company’s trading activities must constitute at least 80% of its whole activities whereas the current definition is usually understood to be 51%. Raising this threshold is likely to mean that many companies would no longer qualify as “trading companies”, and so future BPR eligibility should be reviewed.

Capital Gains Tax (CGT) uplift

Perhaps the most controversial recommendation is as regards “the CGT uplift”. Currently on death, IHT is charged on the market value of assets in the individual’s estate. To avoid double taxation, individuals inheriting assets from the estate are treated as acquiring them at probate (market) value. This uplift for CGT is available even if no IHT is actually paid on the asset.

 The OTS recommends that the CGT uplift is removed where no IHT has been paid on the assets because of reliefs or exemptions such as spousal exemption, BPR or Agricultural Property Relief. CGT on a subsequent disposal by the estate or beneficiary would be calculated by reference to the original base cost.

This is clearly not a simplification as asset histories will have to be traced on death and will need to be passed on to beneficiaries. The OTS believes that the current rule “distorts the behaviour of taxpayers and leads to loss of tax.”    

Where individuals have carefully planned how to pass assets to their beneficiaries, if the recommendations are enacted, then there may be significant CGT costs to be paid by beneficiaries who sell inherited assets that the deceased had owned for many years.

If the above recommendations are enacted, existing succession planning will need to be reviewed.

How we can help

The issue of inheritance tax is, as you can see from the above, a complex tax and therefore we strongly recommend taking advice from a professional who understands this area of taxation. Do contact your local MFW office for any help with inheritance tax or other tax matter. Our specialist tax teams will be able to assist you and ensure you don’t fall foul of HMRC.