Inheritance Tax: New Recommendations from the Office of Tax Simplification

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Inheritance tax is, on the face of it, a fairly simple tax to apply.If the value of your estate at the date of your death exceeds your available allowances, tax of 40% on the excess becomes due.However, as with everything in life, scratch the surface and a Pandora’s box of complications emerge.

The Office of Tax Simplification have been reviewing Inheritance Tax both on death and on lifetime transfers in respect of the various reliefs available. No doubt this is in an attempt to bring about a more coherent regime rather than the current patchwork of rules, exemptions, reliefs and oddities which have arisen since Inheritance Tax was first introduced in 1986.

They have put these recommendations to The Government in their latest report and although certain elephants in the room appear to be occupying Parliament’s minds to the exclusion of all other issues, no doubt this will be reviewed and acted upon at some point in the near future.

They have identified three key areas which they feel are right for reform.

The first of these is lifetime gifting. They have identified no less than 12 different types of exemptions and reliefs offered for lifetime gifting and they have suggested the following:-

  • The introduction of an overall personal gift allowance to replace the annual gift exemption, exemptions for gift in consideration of marriage or civil partnership and to review this in conjunction with the small gifts exemption
  • Reformation of the exemption for normal expenditure out of income, perhaps folding it into a higher personal gift allowance
  • Reducing the survivorship period for capital gifts from 7 to 5 years but abolishing taper relief on any Inheritance Tax which may result as a consequence of failing to survive this period
  • Simplifying the rules on the liability for payment of tax on lifetime gift to individuals which arise as a result of the death of the donor within that 5 year period.

The second key area identified is the interaction of Inheritance Tax with Capital Gains Tax. It is proposed that if a taper relief or exemption from Inheritance Tax applies to the gift or asset in question then removal of the Capital Gains uplift should be considered so that the recipient receives the assets at the base cost of the person who gifted it to them, either during their lifetime or on death.

The third key area is the availability of Agricultural Property Relief and Business Property Relief in relation to:-

  • Trading activity and the reliefs available for holdover or entrepreneur’s relief
  • Treatment of indirect non-controlling holdings in trading companies
  • Bringing holiday lets fully into the BPR regime
  • Treatment of limited liability partnerships in a similar fashion:
  • Reviewing their current approach to the eligibility of farmhouse as the APR.At present, their approach is fairly draconian and it is recommended that in “sensitive cases, such as where the farmer needs to leave the farmhouse for medical treatment or going to care”, APR should not be denied simply because at the date of the gift or death the farmer was not in occupation and farming;
  • Clarification on guidance as to when valuation of the business or farming assets is required and whether there should be a full formal valuation carried out by an appropriate person or whether it should simply be an estimate.

They have also recommended reviewing the position relating to death benefit payments from life insurance to make them Inheritance Tax free and reviewing the Pre-Owned Asset Tax Rules, which are both complicated and are questionable as to whether they function “as intended”.

Obviously, these are all merely recommendations and no doubt The Government will go through them to see what, if anything, is to be done.In other words, “watch this space”.

For advice on inheritance tax, please contact Alastair Liddiard.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.