Changes on the Cards
The Inheritance Tax rules were introduced more than 30 years ago and have since been amended piecemeal by various Acts of Parliament. Our head of Private Client, Partner Elaine Lightfoot, looks at the current status of potential changes to the rules.
In January 2018, the Chancellor asked the Office of Tax Simplification (OTS) to review Inheritance Tax and make recommendations to simplify the rules and procedures. The OTS published an online survey inviting members of the public to contribute their views on Inheritance Tax, as well as meeting with representative bodies, professionals and academics. Following an unprecedented response, the OTS had to split its evaluation in two. The first part published in December 2018, focussed on administrative issues. The second part published in July 2019 dealt with the technical and design issues of IHT.
Inheritance Tax is paid primarily on the estate (the property, money and other possessions) of someone who has died. Everyone has an amount that they can leave or give to others tax free, this is known as the nil rate band (NRB) and is currently set at £325,000 (or higher if using the transferable nil rate band); there were no recommendations by the OTS to alter this threshold.
The OTS does however suggest merging the maze of Lifetime Gift categories into a single allowance, together with reviewing both the business property relief and agricultural property relief rules and interaction with capital gains tax.
Most gifts you make to other people during your lifetime are classified as “potentially exempt transfers” or PETs for short. If you die within seven years, the value of the gift will be added to your estate and reassessed against other PETs you have given and your tax-free allowance. There may be Inheritance Tax due on gifts made during the seven-year period prior to the death of the person making the gift, although the rate may be reduced depending on when it was given and the circumstances by applying taper relief. Currently, if tax does become due on a PET, the person who received the PET will be asked to pay the tax. In its report, the OTS suggests shortening the time limit for taxable gifts to five years, abolishing taper relief and that the estate should be liable for paying Inheritance Tax on gifts.
Exemptions relating to businesses and farms were evaluated considering trading activity rules, how indirect non-controlling holdings in trading companies are treated; considering whether to align Inheritance Tax rules on furnished holiday lets with rules for income tax or capital gains tax.
There is much confusion surrounding interaction between the various tax regimes: Generally, if you inherit an asset, you can sell it shortly afterward without needing to pay capital gains tax. This is because HMRC looks at the asset’s market value when you receive it, rather than the price the deceased originally paid for it.
Recommendations also suggest that term policies should be exempt from IHT regardless of whether they are written in trust.
At this stage the OTS report only makes recommendations, so the current rules have not changed. As the Inheritance Tax regime changes regularly, expert legal advice is essential to ensure your estate is Inheritance Tax efficient. We can advise you on how to navigate the complex web of IHT reliefs and exemptions applying a wide range of tax planning measures to reduce Inheritance Tax liability.