Inheritance tax – a simpler future?

Following an unprecedented level of engagement, including nearly 3,000 responses to an online survey, 500 emails from members of the public and 100 written responses to a call for evidence, the Office of Tax Simplification (OTS) has issued its recommendations for a simpler Inheritance Tax (IHT) system.

In the current political environment, it is difficult to predict whether the recommendations will to lead to actual legislative changes. But, given that the Chancellor requested the review, we can expect the current Government to give it serious consideration.

For that reason, if you are already considering your inheritance tax position, it is certainly worth being aware of the recommendations.

Specific recommendations

Of the report’s 11 specific recommendations, the most significant potential changes worth highlighting are:

  1. A proposed overhaul and general increase in lifetime gift exemptions.
  2. A reduction in the time which must elapse before a significant lifetime gift becomes fully exempt from IHT. Currently, an individual must survive seven years after a large gift, whereas the OTS recommends this is reduced to five years. At the same time, it is recommended that current IHT taper rules are abolished.
  3. A removal of the capital gains uplift if no IHT is payable on an asset on death. This would mean that spouses receive assets at their partners original cost (as is currently the case with a spouse gift during lifetime), likewise for recipients of other assets which benefit from 100% IHT relief on death, such as business assets . This recommendation could result in larger future Capital Gains Tax liabilities, depending on when an asset is sold, but it may also encourage earlier succession rather than waiting until death.
  4. Finally, it is recommended that the qualifying conditions for IHT Business Relief are aligned with similar Capital Gains tax business reliefs. This would lead to a more difficult qualifying test for business owners and ultimately fewer businesses would qualify for the relief.

Any recommendations for simplification are welcome, however as often is the case, new legislation will add in its own complexities and it seems here that there may be a number of situations where there would be additional tax payable as a direct result of these recommendations, if they are implemented.

The taxation of Trusts was briefly considered as part of the OTS review, but this will be dealt with by HMRC in their on-going review of the overall taxation of Trusts. HMRC are currently digesting the views obtained during their own consultation progress and they have yet to confirm their findings.

Contacting Sagars

If you would like us to help you plan for your future or you are interested in understanding how the OTS recommendations could affect your IHT planning, please get in touch with your usual Sagars contact or call Gunhild Dam on 0113 297 6770.