In January 2018 Phillip Hammond commissioned the Office of Tax Simplification (OTS) to carry out an extensive review of the current Inheritance Tax (IHT) regime.
In November 2018 the OTS released part-one of their review, which focused mainly on administration issues.
The second report has now been published, headed “Simplifying the design of Inheritance Tax”:
It focuses on three key areas:
- Lifetime Gifts
- Interaction with Capital Gains Tax (CGT)
- Businesses and Farms
The full report extends to 103 pages and can be found here. Within the three key areas were 9 recommendations, with a further 2 recommendations in other areas of IHT, summarised below:
- Replace the current gift exemptions including the normal expenditure out of income with a higher personal gift allowance.
- Reduce the 7 year “clock” to 5 years and abolish taper relief.
- Remove the need to take account of gifts made outside the 7-year period when calculating IHT due (known as the 14-year rule).
- Simplify and clarify the rules surrounding who is responsible for paying IHT on lifetime gifts and the allocation of the nil rate band.
Interaction with CGT
- Where a relief or exemption applies, consider removing the Capital Gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the deceased.
Businesses and Farms
- Consider whether the required level of trading activity remains appropriate for business property relief (BPR) claims, review the treatment of indirect non-controlling holdings in trading companies and consider whether to align the IHT treatment of furnished holiday lets with that of Income Tax and CGT, where they are treated as trading providing that certain conditions are met.
- Review the treatment of limited liability partnerships to ensure they ae treated appropriately for BPR purposes.
- Review the current approach around the eligibility of farmhouses for agricultural property relief (APR) in sensitive cases such as where a farmer needs to leave the farmhouse for medical treatment to go into care.
- HMRC should be clear in their guidance as to when a valuation of a business or farm is required and, if it is required, whether this needs to be a formal valuation or an estimate.
Other Areas of IHT
- Consider ensuring that death benefit payments from term life assurance are IHT free on the death of the life assured without the need for them to be written in trust
- Review the pre-owned asset tax (POAT) rules and their interaction with other IHT anti-avoidance legislation to consider whether they function as intended and whether they are still necessary.
If implemented, some of the recommendations listed above could give land owners pause for thought regarding their existing succession plans. For example, removing the re-basing of assets on death could incentivise farmers to transfer assets during their lifetime rather than on death as by utilising holdover relief on transfers of business assets, CGT could be deferred until the land is actually sold.
The review of APR on the farmhouse if the farmer needs medical treatment or goes into care, would appear to be a softening of the current approach to deny relief in such circumstances. Any changes that provide clarity on the availability of APR on farmhouses would be welcomed.
It is however important to note that all the recommendations highlighted in the report are just that – recommendations. The treasury has commented that it will respond in due course, but given the current political turmoil, it is not known which recommendations will be acted upon, or indeed when.
If you would like to discuss any of the proposed changes or have any questions regarding IHT, succession and estate planning, please do not hesitate to contact us.