The Office of Tax Simplification (OTS) has released a second report this week as part of a wider inheritance tax review following a consultation process that highlighted the limited understanding the general public has about the way inheritance tax works, and the complexity of the tax.
Inheritance tax applies on death to the assets of the deceased and gifts made within the final 7 years of their life. It can also apply to some types of lifetime gifts.
The OTS are independent advisors to the government, and headed by Bill Dodwell (someone I worked with during my time at Deloitte), a very well respected member of the tax profession who along with this role, has held prestigious offices in the past (and as a result his advice carries significant weight, and consequently, these recommendations should be considered as a ‘crystal ball’ as to future changes).
The key recommendations can be summarised as follows:
- there is a complex array of exemptions that are available for gifts which creates considerable confusion (such as the annual £3,000 exemption) – additionally, the levels of these exemptions have not changed for a considerable length of time resulting in them being of limited value;
- the abolishment of taper relief – taper relief for inheritance tax incurred on lifetime gifts that fall within the last 7 years of the deceased’s life currently applies – however, its value is often overrated given that available nil-rate bands are applied against such gifts chronologically – consequently, unless such gifts were very sizeable, taper relief will not be of any benefit;
- it is recommended to allocate the nil-rate band proportionately across all such gifts, rather than applying it chronologically;
- any inheritance tax due on such ‘failed gifts’ is payable by the recipient of the gift – it is recommended that this is changed to the tax being payable by the deceased’s estate;
- it is recommended that the 7 year period for lifetime gifts subject to inheritance tax on death is reduced to 5 years;
- capital gains tax isn’t payable on death and all assets are treated as receiving a ‘base cost uplift’ to the market value at the date of the deceased’s death – it is recommended that where an inheritance tax relief or exemption applies to an asset, that the beneficiary of such an asset would not benefit from this uplift;
- changes to the valuable inheritance tax reliefs ‘agricultural property relief’ and ‘business property relief’ are proposed (many I have anticipated for some time):
- it is recommended that the level of trading activity (currently more than 50%) required for qualification for business property relief is aligned with the test for capital gains tax (more than 80%);
- it is recommended that more clarity is provided regarding the availability of business property relief for furnished holiday lets – the implication is that the position should be that if the holiday let qualifies as a ‘furnished holiday let’ for income tax purposes, then it should qualify for inheritance tax business property relief;
- it is recommended that the agricultural property relief position is reviewed in relation to farmhouses where the farmer needs to vacate the farmhouse for care or medical treatment – currently, this can result in an inequitable outcome being the loss of the relief;
- the inheritance tax position of death benefit payments from term life insurance so that such benefits are free from inheritance tax on death without the needs for the policies to be written in trust; and
- A review of the onerous ‘pre-owned assets tax’ rules.
My thoughts are that many of these recommendations are logical and welcomed. Many will look at things like the proposed abolition of taper relief and the abolishment of the small exemptions as being unpalatable, however, the changes address benefits that carry little value in practice and would reduce unnecessary complexity.
The reduction in the 7 year period to 5 years is welcomed, as is the good news for furnished holiday let owners (if the recommendation is followed) – the latter obviously being huge news for Cornwall!
The big areas that raise serious concern are:
- Something to address the issue regarding agricultural property relief on farmhouses where the farmer has had to leave the farmhouse for medical reasons is long overdue and welcomed;
- The increase in the required level of trading activity required for business property relief to be available – something I have been warning about for some time – I’d suggest advice from an experienced Chartered Tax Adviser is sought and contingency plans are fast-tracked. This could leave many exposed; and
The abolishment of a capital gains base cost uplift for assets that qualify for inheritance tax reliefs or exemptions is admittedly logical, but it would be a significant benefit lost for many.
This publication has been prepared by RRL LLP. It is to be treated as a general guide only and is not intended to be a comprehensive statement of the law or represent specific tax advice. No liability is accepted for the opinions it contains, or for any errors or omissions. All rights reserved.