Inheritance tax could be due to change
Reform of inheritance tax has been recommended by the Office of Tax Simplification (OTS) in its latest report, which was undertaken in response to a request from the Chancellor of the Exchequer in January 2018.
The recommendations from the OTS aim to cut the complexity of the so-called “death tax”. They include changes to the rules surrounding gifts of cash, property and other assets made during a person’s lifetime, and an overhaul of the relationship between inheritance tax and capital gains tax for farm and business assets.
Proposals relating to lifetime gift exemptions include a replacement of some of the current exemptions with a single personal annual allowance, a revised threshold for small gifts, and reform of the regular gift out of income exemption.
The OTS also recommends that the current seven-year gifting rule for potentially exempt transfers be cut to five years. This is the period which must elapse from the date that a lifetime gift is made until the date of death in order for the gift to be exempt from inheritance tax. These reforms would also see an end to the complicated taper relief by which the tax charged on gifts may be gradually reduced from year three of the current seven-year period. Where IHT is due on lifetime gifts, the OST also propose that the rules on who is liable to pay the tax should be simplified.
Also in the spotlight for reform is the relationship between inheritance tax and capital gains tax in the reliefs available for businesses and farms. When passing on a farm or a business, different tests are applied depending on whether the disposal is following death or during lifetime, as the rules are different for inheritance tax and capital gains tax. It is very complex and has an impact on decision making because of the different tax outcomes for what is essentially the same action. The implications of the proposed reforms will need to be considered if and when they are put in place.
It is important to note that the current rules have not yet changed. The OTS report makes recommendations that the government will now need to consider.
If any of the proposed changes are made then individuals may need to review existing estate planning.
Please contact the Wills, Probate and Trusts team if you would like information or assistance in this area.
Please note that this is not legal advice and is only intended to provide information of general interest about current legal issues.