The Office of Tax Simplification (OTS) have issued this month the results of a review of Inheritance Tax which was requested by the Chancellor in January 2018. Their initial findings released in November 2018 determined that around 5% of all Estates each year are required to pay Inheritance Tax. They then went on to review the intention of Inheritance Tax and determine what would make it easier to understand and simpler to operate.
Inheritance Tax can be levied both on death and during life where a chargeable transfer is made.
There are many allowances and reliefs that can be claimed of differing amounts and rules around to whom these gifts can be made.
Eleven recommendations were made in the report which covered lifetime gifts; the interaction with Capital Gains Tax and Businesses and Farms.
Allowances and Reliefs
It was felt that the general lifetime gift allowances and reliefs are so numerous that it causes confusion and so proposals include creating a Personal Gift Allowance. This would be available each year, and would be an amount that would enable individuals to make gifts, whilst replacing the numerous exemptions. It will also be considered whether a higher gift allowance should be available to replace the exemption of normal exemption out of income.
This would simplify advice for clients wanting to make gifts but could negatively affect those who have made use of the “normal expenditure out of income allowance” which currently has no upper limit.
Potentially Exempt Transfers
Currently where individuals make gifts, if they do not fall under the exemptions or allowances mentioned above, then individuals are required to survive for seven years from the date of gift to make them exempt.
There is also the ability to apply taper relief to this gift if it has been made more than three years from the date of death, when calculating Inheritance Tax in the Estate.
The OTS are proposing that instead of having these two confusing elements, to streamline and have a period of five years after which the gift would be exempt.
This appears to be a sensible option, although again it would impact on those who consider the taper element to be of benefit on large gifts.
Capital Gains Tax
The OTS looked at the position in relation to Capital Gains Tax and Inheritance Tax. Currently assets’ base costs are automatically increased to probate value on death. In addition, some types of asset can also be exempt from Inheritance Tax, for example shares in an unquoted trading company. This means that if the assets are sold shortly after death, no Capital Gains Tax or Inheritance Tax would be payable.
The OTS believe that this creates a distortion and are proposing that where an Inheritance Tax exemption is available the Capital Gains Tax uplift to probate value should be removed. This will mean that once the assets have passed from the Will, the individual will receive the assets at the original base cost and so Capital Gains Tax will be liable on disposal.
This is obviously not beneficial to the individuals receiving the assets and could create situations where beneficiaries choose not to take the assets left to them in the Will as they may not wish to pay tax at a later date.
Businesses and Farms
In recent years the availability of Inheritance Tax Relief on furnished holiday let properties has been severely restricted by case law. The OTS are suggesting that the reliefs available for these businesses should be reviewed. Including considering whether the trading rules should be adjusted to allow these types of properties to be eligible to Inheritance Tax.
Farmhouses can in certain circumstances be eligible for Inheritance Tax reliefs where the farmer lives in the property and continues to trade in the business. However, if there is a requirement for them to leave for medical care, then this relief can be lost. The OTS are suggesting that this should be reviewed in situations where there is a requirement for the owner to leave and instead relief being maintained.
The OTS also looked at the Residence Nil Rate Band which is still in the process of being introduced. It was felt at this stage that, because the relief is so new, more time is needed before any evaluation is undertaken.
This is similar to the Charitable Donation Relief where Inheritance Tax can be reduced to 36% from 40%, where a minimum of 10% of the net Estate is left to charity. Again, this has only been in place since 2012 and so a review of its effectiveness will be undertaken at a later date. However, it is felt that it is a lesser known relief and so underused.
At the moment, these are only proposals and none may be taken up by the Government, as we are waiting for our new Prime Minister and also the possibility of a General Election.
Therefore, you should not delay in undertaking your Inheritance Review, as making gifts now can start the seven year time period clock, which will start the period during which Inheritance Tax can be relieved.
If you wish to have a review undertaken of your Inheritance Tax, please contact Lucy Orrow who will be able to assist you.