Inheritance Tax – Where Next?

The Office of Tax Simplification (OTS) was asked by the Government to conduct a review of Inheritance Tax (IHT) and that process was concluded with the publication of a report in July 2019. It came as no surprise to solicitors, accountants and anyone who has lost a loved one recently to read that the OTS found the present system for raising and collecting IHT to be inefficient and overly complicated. In the year of review there were 590,000 deaths in the UK, 275,000 of which resulted in IHT forms being submitted and of those only 24,500 generated any IHT for the Treasury. The IHT paid has grown considerably over the years reaching £5.2 billion in 2017/18 but the cost of collection to the public and Treasury has also increased. This form-filling burden has been exacerbated by increasingly complicated rules and the failure of the IHT reliefs and exemptions to keep track of inflation. Having set the scene what did the OTS recommend?

Lifetime gifts – the 7 year gifting period should be reduced to 5 years and all other exemptions should be rolled into this. This simplification and shortening of the risk period will help with record-keeping and encourage gifting. The trade-off is that taper relief would be abolished (this would impact very valuable gifts made between 3-5 years before the death).

Capital Gains Tax Interaction – if a gift is exempted from IHT then it should not also be protected from CGT.

Businesses and Farms – the benefit of the doubt should be given to farmers who have to leave the farmhouse due to ill-health. The question was posed as to whether the relief was too generous for businesses which are highly flexible and non-traditional?

Term-Life Assurance – if written in trust such policies pay out free of IHT. However, most are not written in trust due to lack of customer knowledge and insufficient provision of useful guidance from the insurance industry. The OTS recommended that such policies be payable IHT free to relieve hardship and avoid penalising the public for lack of specialist knowledge.

The Pre-Owned Asset Charge – this had been brought in to target a specific abuse but the remedy had been poorly thought through and there was little understanding of the charge and a relatively small amount was collected in. Had it served its purpose or were there better solutions to the problem of people avoiding IHT?

It is comforting to note that the OTS recognises that if its recommendations are adopted then the public and professionals should be given plenty of advance notice to get their affairs in order (ie review and plan gifting, re-write wills, amend or create trusts).

Since the report was published there has been the election of a Conservative Government with a strong mandate. It may now feel emboldened to get stuck into these issues. On the flip-side the austerity shackles have been loosened so with public sector spending set to rise, it seems unlikely that any attempts at simplification will produce a smaller IHT bill.

Author: Mark Francis