In January 2018, the Chancellor asked the Office of Tax Simplification (OTS) to review a wide range of administrative and technical aspects of Inheritance Tax (IHT). The OTS is the independent adviser to the government on simplifying the tax system. Its work is rooted in improving the administrative processes, as well as simplifying the rules.
What followed from the Chancellor’s request were two separate reports compiled by the OTS, one published November 2018 covering the administration of IHT, while the second report, published in July 2019, explores the main complexities and technical issues that arise from the way inheritance tax works.
Below we look briefly at the more recent recommendations made by the OTS, and whether these proposed changes are likely to take effect.
What are the main recommendations for change?
A fundamental requirement for the legitimacy of IHT is that its framework should be reasonably clear to the majority of those potentially liable to it. As such, the underlying premise of the OTS report is to make inheritance tax easier to understand, as well as more intuitive and simpler to operate.
Indeed, the extensive consultation exercise undertaken by the OTS revealed several areas where inheritance tax is either poorly understood, counter-intuitive, requires substantial record-keeping, creates distortions, or where the application of the law is simply unclear.
Accordingly, the OTS made a total of eleven recommendations, albeit these primarily concentrated on the following three key areas of inheritance tax:
- Streamlining gift exemptions and changing the way IHT works in relation to lifetime gifts
- Changing the interaction between IHT and capital gains tax (CGT)
- Addressing distortions in the operation and scope of reliefs such as those for business property and agricultural property.
That said, many of the problems identified are connected, so solving one in isolation would simply create knock-on issues in other areas. This is why some of the recommendations made by the OTS comprise of packages of changes that would need to be implemented together.
By way of illustrative example, we look at the recommendations made by the OTS in relation to lifetime gifts.
Lifetime gifts illustrative example
This refers to the treatment of gifts made during a person's life and the interaction of such gifts with those made on death under a Will.
Firstly, the OTS acknowledged that the present system of gift exemptions is complex and creates confusion, not least because there are several monetary thresholds to be considered, and each applies in a slightly different way.
Further, the exemption for regular gifts from disposable income, referred to as normal expenditure out of income, can require extensive record-keeping and the scope of the exemption is disputed.
Accordingly, it is recommended that the government should, as a package:
- Replace the annual gift exemption and the exemption for gifts in consideration of marriage or civil partnership with an overall personal gifts allowance
- Consider the level of this allowance and reconsider the level of the small gifts exemption, and
- Reform the exemption for normal expenditure out of income or replace it with a higher personal gift allowance.
Secondly, in relation to the gifting period and taper relief, consultation responses indicated that the current period of seven years, during which a lifetime gift may become subject to IHT is too long. This period requires a large amount of record-keeping yet raises little tax, not least because the rate of inheritance tax for gifts made more than three years before death is reduced by way of taper relief.
Furthermore, the way this works is widely misunderstood. In particular, many people do not appreciate that taper relief is only relevant to people who make substantial lifetime gifts totalling more than the nil rate band.
Accordingly, it is recommended that the government should, as a package:
- Reduce the seven year period to five years, so that gifts to individuals made more than five years before death are exempt from IHT, and
- Abolish taper relief altogether.
The government should also remove the need to take account of gifts made outside of the seven-year period when calculating the inheritance tax due under what is known as the fourteen-year rule.
Finally, it is suggested that the government should explore options for simplifying and clarifying the rules on liability for the payment of tax on lifetime gifts to individuals and the allocation of the nil rate band.
Are these recommendations likely to take effect?
Although multiple recommendations have been made, this does not necessarily mean that change is imminent. Within the report itself, the OTS recognises that the purpose of the report was simply to explore various ideas to support further dialogue about ways in which inheritance tax can and should be improved.
It therefore remains to be seen whether the government chooses to put any of these ideas into practice. That said, given the unprecedented level of engagement in the consultation process, 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, it is hoped that the recommendations made by the OTS will, at the very least, generate fruitful discussion.
Perhaps the issue of inheritance tax and potential change should also be put in context. In practice, as highlighted by the OTS in its first report, very few people are currently within the scope of IHT, with fewer than 25,000 estates being liable each year. This is less than 5% of all deaths.
Contact Our Tax and Estate Planning Solicitors, London
For those of you whose estate is likely to fall within the scope of inheritance tax, Lewis Nedas' Tax and Estate Planning Lawyers have the legal know-how to help you minimise the likely IHT payable out of your estate after you die, and thereby maximise the amount you can leave to your loved ones tax-free.
We will provide tailored advice based on your particular financial circumstances, helping you to plan ahead for the future of your family.
Our expert lawyers will not only be able to offer you estate planning advice based on the current IHT rules, but they can also provide advice and assistance if you find yourself bereaved and potentially facing a significant tax liability.
For further information please contact us on 020 7387 2032 or complete our online enquiry form.
