The Death of Inheritance Tax as we know it?

by Matt Herd

Many individuals and business owners let out a collective sigh of relief as the new Chancellor, Rishi Sunak, stepped away from the dispatch box on 12th March having made no mention of Inheritance Tax (IHT) within his Budget speech.  Further inspection of the “small print” confirmed that no changes to the current regime had been announced…yet!

For many years, the rumours that changes are to be introduced to the IHT system have largely come to nothing.  However, the current government seem to have this emotive tax firmly in their crosshairs.  In a response to a request that they review the administrative and technical aspects of IHT, the Office of Tax Simplification (OTS) last year published their second report looking at the simplification of IHT.  More recently, the All Party Parliamentary Group (APPG) have issued a report looking at the reform of IHT.  

The APPG report sets the scene by stating that fewer than 5% of deaths actually result in payment of IHT.  That there are 588,000 deaths each year, of which 275,500 are required to complete an IHT form and that of these only 24,500 result in payment of tax. The report goes on to explain that a growing number of estates are affected by IHT due to rising asset values and the decade-long freezing of the threshold at which inheritance tax starts being paid.

The reports from both bodies suggest that the existing rules are overly complex and recommend that comprehensive changes to the current system be made.  

“Inheritance tax (IHT) is a tax on transfers of wealth, mainly levied on a person’s death. It is often criticised as complex, ineffective, riddled with anomalies, distortionary and unfair. It is unpopular and ripe for reform.” – APPG report January 2020

Both reports consider the abolition of Agricultural Property Relief (APR) and Business Property Relief (BPR).  Reliefs which are currently extremely valuable to business owners and farmers and play a key role in the effective structuring of business succession planning. 

The APPG report went even further, effectively recommending a complete overhaul of the legislation including the removal of the current “tax free uplift” applying on death for Capital Gains Tax (CGT) purposes.  While the recommendations undoubtedly represent significant simplifications, they could see the IHT liability of many estates increase substantially as well as the level of CGT due on the future sale of inherited assets by beneficiaries.

Living on borrowed time

It seems likely that in delivering his budget, Mr Sunak has had to put certain plans on the back burner while he addresses the urgent matter of the UK’s response to the coronavirus outbreak.  It is important to remember that an autumn budget is anticipated and that the Chancellor may have had to delay certain less popular announcements until the later in the year, possibly including fundamental changes to the IHT System.

Individuals and business owners may wish to review their circumstances and take advantage of the current tax reliefs and allowances available before they are potentially reduced or withdrawn altogether.

Gifts and allowances

Almost all lifetime transfers from one individual to another are a potentially exempt transfer (PET).  PETs are only chargeable to IHT if the donor dies within seven years of making them.  Even then, there will be no tax to pay on a potentially exempt transfer unless, when added to chargeable transfers in the seven years before it, it exceeds the nil rate band at death.

Small gifts – Any outright lifetime gifts to any one person in any one tax year are exempt if the total gifts to that person do not exceed £250 in that year. 

Gifts in consideration of marriage – Gifts of up to £5,000 by a parent, £2,500 by a grandparent, £2,500 by one party to the marriage or civil partnership to the other, or £1,000 by anyone else are exempt. 

Normal expenditure out of income – To obtain this exemption the gift must be part of the donor’s normal expenditure. It must, taking one year with another, be made out of the donor’s income and must not reduce his available net income below that required to maintain his usual standard of living.  

Annual allowance – The first £3,000 of lifetime transfers in any tax year are exempt. Any unused portion of the exemption may be carried forward for one year only for use in the following tax year after the exemption for that following tax year has been used.

Other Gifts – Gifts to charities, political parties and registered community amateur sports clubs are exempt

Reliefs

Business property relief – BPR is available on the value of transfers of business property, providing certain conditions as to the length of ownership and type of business are satisfied.  

Qualifying business property might include:

A sole trader or interest in a partnership

unquoted shares

land or buildings, machinery or plant used for a business carried on by a company of which the donor had control; or a partnership in which he or she was a partner.

The property transferred must normally have been owned by the donor throughout the previous two years. 

Agricultural property relief – APR is available on the transfer of agricultural property situated in the UK, Channel Islands, Isle of Man or in any country that is a member of the European Economic Area, so long as various conditions are met. The relief only applies to the agricultural value of the property.

The agricultural property must at the time of the transfer have been either occupied by the donor for agriculture throughout the two years ending with the date of transfer or owned by the donor throughout the previous seven years and occupied for agriculture by him or someone else throughout that period. 

Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB)

In addition to the above allowances and relief’s, all individuals are entitled to an IHT Nil Rate Band (currently £325,000) and in certain circumstances an addition Residence Nil Rate Band (£175,000 from 6 April 2020).  Careful lifetime and estate planning should be undertaken to ensure these valuable allowances are not wasted.

Our IHT experts are available to provide advice in relation to all aspects of effective IHT planning from lifetime giving to business succession and estate planning.

Author

Matt Herd

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