The Office of Tax Simplification (‘OTS’) has published its long-awaited review on reforming Inheritance Tax. The report focuses on how Inheritance Tax could be made “easier to understand and more intuitive and simpler to operate”. Proposals to overhaul the Inheritance Tax may look good on the surface but it is also important to consider how the removal of complexity would lead to the abolition of some useful tax breaks.
The stand-out proposal from the OTS is the reduction of the seven-year gifting rule to five years. This will see individuals being able to make gifts and only have to survive five years for the gift to fall out of their Estate for Inheritance Tax purposes. However, this proposal does come with the removal of taper relief that is presently available. This means that substantial gifts will see no tax deduction after three years and the person making the gift will need to survive the full five years from the date in which the gift was made for it to have any Inheritance Tax benefit.
The OTS is also proposing to amend the general exemptions around gifting and bring them all into one pot. These have not been changed for several decades and cover small capital gifts, the annual exemption and gifts for weddings, etc. The proposed changes would see one large annual exemption of capital gifting which would be more straightforward.
The sting in the tail is the proposal for the removal of gifting excess income after the deduction of normal expenditure. This exemption is not widely used or even known about, yet often for high earning individuals this can be a way to gift money in an Inheritance Tax free way, without having to survive seven years.
There was no reference in the OTS’s report to increasing the Nil Rate Band, or making the Residence Nil Rate Band fairer for those without children or with Estates above £2million.
Capital Gains Tax interaction
One of the proposed changes relates to the interaction between Capital Gains Tax and Inheritance Tax that could potentially be negative for the taxpayer. Presently Capital Gains Tax is calculated on how much the asset has increased in value since the date of the person’s death. Put simply this means that when the asset is disposed of Capital Gains Tax could be due on the increase in value from when the person died to when the asset was sold, transferred or given away. The proposal is to abolish the base cost uplift for Capital Gains Tax on death when there is no Inheritance Tax payable on the asset. This would mean that when an asset is disposed of the acquisition cost will be used to calculate any gain in value for Capital Gains Tax purposes as oppose to the value of the asset at the date of death.
This change would potentially remove a particular strong area of planning and would also potentially see HMRC picking up more Capital Gains Tax and making it more difficult to dispose of assets without potentially incurring a Capital Gains Tax bill.
The Treasury has said it will respond to the report in due course and consider its recommendations.
The expert lawyers in the Wills, Tax and Probate team at Enoch Evans LLP are based across two offices in Walsall and Sutton Coldfield. The team have a wealth of experience in advising upon and drafting Wills. The team are also experts in providing bespoke Estate planning advice including how best to plan for and reduce the Inheritance Tax that will be due on death. The Department is accredited by the Law Society as members of its elite Wills and Inheritance Scheme (“WIQS”).