The new government’s main priority will be to resolve the Brexit impasse, and it may be thought that tax changes will not be immediately forthcoming. However, inheritance tax (IHT) is one tax where fundamental changes are likely.
In November 2018, the then Chancellor of the Exchequer, Philip Hammond, commissioned a report from the Office of Tax Simplification (OTS) on how to simplify IHT from a technical and administrative perspective.
The report which came out in summer 2019 made a number of recommendations, including the following:
Seven-year rule
IHT is calculated on assets held at death and on those given away in the previous seven years. The OTS recommends reducing this to five years, which is an administrative saving, but HMRC data shows that in 2015/16 would only have reduced the overall IHT take by £7 million.
Small gift exemption
we currently have an annual limit of £3,000, plus a £5,000 exemption on marriage, and an unlimited gift out of surplus income. It is worth noting that the £3,000 limit has been unchanged since the 1980s, and if it had been index-linked would now be more like £12,000. The OTS recommends that there be a single annual gift exemption each year.
Interaction with Capital Gains Tax (CGT)
It has long been the case that a person inheriting an asset receives an uplift for CGT purposes. This allows inherited assets to be sold shortly afterwards without paying CGT. The OTS recommends that where an asset has received the benefit of Agricultural Property Relief (APR) or Business Property Relief (BPR), it should not also receive the CGT uplift. The OTS also noted that the current system encourages individuals to hold onto business assets until their death.
Diversified businesses
Currently, if a business is deemed to be ‘wholly or mainly’ a trading business, then the whole business obtains BPR. The OTS recommended that this test be changed so that, in future, a business must be at least 80% trading to obtain relief. This could adversely affect farming businesses and rural estates which have been encouraged to diversify their businesses into rental or investment activities.
Unquoted shares
The OTS noted the increase in investments in Alternative Investment Market (AIM) shares, which qualify for 100% BPR after two years. The report stopped short of recommending reform but questioned whether it was consistent with the original intention of BPR. The new Government may decide to implement some, all or none of the OTS recommendations. The Labour Party has previously said it would be in favour of replacing IHT with a new gift tax. This would result in tax being payable by the recipient of a gift or inheritance, with a suggestion that tax be charged at a person’s marginal Income Tax rate once a lifetime allowance of £125,000 is exceeded. This is a more radical change and will take longer to design and implement.
In conclusion, it is unlikely that the current IHT system will survive unscathed for much longer. Individuals need to be ready to react in order to minimise the liability that will arise following their death.
If you'd like more information or advice on the inheritance tax changes discussed, please get in touch with Keith Johnston on keith.johnston@armstrongwatson.co.uk or call 07793 621981.
