Inheritance Tax Review – Second Report by the Office of Tax Simplification
Last year, the Office of Tax Simplification (OTS) was asked by the Chancellor of the Exchequer to conduct a review into Inheritance Tax (IHT). Published over two reports, the first focused on the administration side of the IHT process and this report looks at the technical aspects, with the various recommendations proposed to make IHT simpler and easier to operate.
The OTS has focused on three key areas of the tax :- Lifetime Gifts, Interaction with Capital Gains Tax (CGT) and Business and Agricultural relief.
The OTS believe that the current array of gift allowances is complicated, these include the £3,000 annual exemption and the various gifting allowances allowed for wedding gifts. It also includes any gifts made from excess annual income.
The report recommends that the government should replace all of these allowances with an overall personal gift allowance set at a much higher level than the current annual gift amount, although this may be lower than the potential gifts made from excess income.
The report also recommends shortening the current 7 year period that an IHT gift may come back into charge, suggesting a 5 year period would be better. It also proposes to remove the current taper relief that is available from year 3 onwards, believing it is too complex and misunderstood.
Interaction with Capital Gains tax
The report highlights that the current interaction between IHT and CGT is complex and can distort decision making. The uplift of an assets CGT base cost to market value on death can lead to people holding on to assets and not passing them to the next generation at the correct time.
The OTS suggests that the government removes the CGT uplift on death, with the recipient of an asset acquiring it at its historic base cost from the person who has died. However, it does not propose any changes to the IHT rules.
Business and Agricultural relief
Currently, the level of trading activity needed to qualify for Business Property Relief (BPR) is different to the comparable conditions of the two main business reliefs for CGT (Gift Hold-Over Relief and Entrepreneur’s Relief), with a business qualifying for BPR if more than 50% of its overall activities are trade in nature. In contrast, the CGT rules require 80% trading activities to qualify.
The OTS suggests that the government should consider whether it is correct to have this difference, and ultimately whether it should increase the BPR trading levels to that of the CGT reliefs.
The OTS also highlighted the lack of consistency in the treatment of Furnished Holiday Lets, where in many cases they are treated as trading for income tax and CGT, but are not generally regarded as trading for IHT purposes. They suggest that the government needs to consider if the IHT treatment of Furnished Holiday Lets should be aligned with the income tax and CGT treatments, where the let is treated as trading.
The OTS state that HMRC should review its current approach to the eligibility of farmhouses qualifying for Agricultural Property Relief (APR) in sensitive cases, such as where a farmer needs to leave the farmhouse for medical reasons, or to go into care.
It will be interesting to see what approach the government will take to these recommendations, and whether or not any are then implemented as legislation. Our taxperts will be monitoring the government’s response to these recommendations and will advise our clients how best to deal with any changes if/as they are implemented.
If you would like to read the full report, please follow the link here.
For further information on IHT, and how these recommendations may affect your individual circumstances, please contact Head of Private Client Tax, Robert Young, on 01307 474274 or another member of the Private Client team.