Stop all the Clocks – OTS Suggest Simplifying Inheritance Tax
In its first report from November 2018, the Office of Tax Simplification (OTS) highlighted the significant difference the number of IHT forms submitted each year (275,000), and the number that resulted in inheritance tax (IHT) being due (24,500), highlighting the administrative burden of the current system.
In its second report, the OTS provides suggestions of how the system could be made easier to understand, more intuitive, and simpler to operate.
A number of IHT reliefs/exemptions apply on gifts made during a person’s life. The OTS note that these can be confusing and difficult to apply, and have therefore made the following recommendations:
1 – Replacement of several monetary gift exemptions (annual exemption, gifts on marriage/civil partnership) with an overall personal gifts allowance. Alongside this they suggest reconsidering the level of the small gifts exemption, and replacing the exemption for expenditure out of income with a higher personal gift allowance.
2 – Reduction of the period on lifetime gifts from 7 year to 5 years, and abolishment of taper relief.
3 – Removal of the “14 year rule”, where gifts made outside of the 7 year period must be taken account of when calculating IHT due.
4 – A simplification and clarification of rules on: a) tax due on lifetime gifts to individuals, and; b) the allocation of the nil rate band.
Interaction with Capital Gains Tax
The OTS note that the capital gains tax (CGT) uplift on death, coupled with certain IHT reliefs on business property and farm assets, can put people off passing assets to the next generation during lifetime. They have therefore suggested:
5 – Removal of the CGT uplift on death, where the same asset is subject to relief from IHT.
Businesses and Farms
Farming assets and trading businesses can benefit from relief from IHT under agricultural property relief (APR) and business property relief (BPR) respectively. The rational behind these reliefs is to prevent the breakup and selling off of such assets in order to pay IHT on the death of the owner. However, there are inconsistencies with the conditions for these reliefs and those applying for other taxes, and so the OTS suggest:
6 – Consider: a) reducing the level of trading activity required for BPR, to bring it in line with gift holdover relief or entrepreneurs’ relief; b) reviewing the treatment of indirect non controlling holdings in trading companies, and; c) aligning the IHT treatment of furnished holiday lets, with conditions for CGT and income tax.
7 – Reviewing the treatment of LLPs in light of the BPR trading requirement.
8 – Reviewing treatment of farmhouses for APR in cases where, for example, the farmer needs to leave the house to go into care.
9 – Clearer guidance on when a valuation is needed of a business or farm, and whether this needs to be a formal valuation or an estimate.
10 – Consider ensuring death benefit payments on term life insurance are free from IHT (without requiring these to be written into trust).
11 – Review the pre-owned asset tax rules to determine if they function as intended and whether they are still necessary.
The OTS act as independent advisers to the government, providing recommendations on how the UK tax system can be simplified and improved. The report provides a valuable contribution to the debate on reforming the current IHT system.
The government may consider the suggestions of the OTS when legislating new tax rules and laws, however it remains to be seen if/how these suggestions will be put into practice.
“Keep Capital Allowances” says OTS (19 July 2018)