Bruce Pearce 31 July 2019
We’ve seen a flurry of Inheritance Tax (IHT) proposals and reviews recently. Last month we saw Labour propose that instead of having the current nil rate band of £325,000, it would be replaced with a lifetime allowance on the gifts each person could receive of £125,000.
More recently the Office for Tax Simplification (OTS) have made suggestions for reforms of the current rules, to remove unnecessary complexity.
What are the suggestions?
- Replace the exemption for wedding gifts and the annual allowance with an overall personal gifts allowance.
- Revisit the level of this allowance – and the small gifts exemption too.
- Reform the exemption for gifts made as normal expenditure out of income (which requires extensive record-keeping and proof in order to apply) or replace it with a higher personal gift allowance.
- Reduce the length of time for large gifts to be out of the estate from 7 years to 5 years.
- Remove taper relief on gifts made more than three years before death – but less than seven years – as it’s widely misunderstood.
- Remove the need to take account of gifts made outside of the 7 year period when calculating the IHT due (under what is known as the ’14 year rule’).
- Change the rules about how the nil rate band applies to lifetime gifts that become chargeable on death. Currently they are assessed in chronological order with any tax payable by the more recent recipients. In future a proportion of the nil rate band could be allocated to each gift.
- Reform how IHT is paid on gifts made fewer than seven years before death.
Many people don’t know IHT is payable by the person receiving the gift. The OTS suggests either making it payable by the estate or allowing the executors of the will to pay it from any further gifts due to the same person if the taxman cannot get the tax direct.
There were two main recommendations which would simplify IHT and are very much welcomed by us, which look at gifting and the seven year ticking clock.
New gifting allowance
Reduce the seven year ‘ticking clock’
Under current rules we all have numerous gift allowances, like wedding gifts, small gifts and an annual exemption. The report proposes that they’re merged into an overall personal gifts allowance, something that’s very welcome and long overdue.
The wedding gifts exemption was always peculiar, so replacing this, and the annual gift exemption, with an overall personal gifts allowance is a great idea. Given how long these allowances have been frozen, it’s about time the levels were reconsidered too.
If you make larger gifts to loved ones, it currently takes seven years for the value of the asset to leave your estate. Reducing the length of time from seven to five years is a sensible proposal, as the current system requires too much record keeping, and forward planning. And getting rid of the complicated rules that means gifts made 14 years ago could end up dragged back into IHT calculations will avoid some horrible surprises.
It would also be a welcome change if death benefit payments from term life insurance were always inheritance tax-free, so they don’t have to be written in trust in order to fall out of the estate. This would stop a lot of people accidentally increasing their IHT liability.
Here’s a summary of all the recommendations made in the report:
Unfortunately the report stops short of making recommendations in two vital areas. We wanted to see the residence nil rate band merged with the nil rate band, as introducing it in the first place was an extra complication – but the report decided it was too soon to judge.
Similarly we’re going to have to keep waiting for the much-needed simplification of trusts, because the report said it was waiting for HMRC’s findings on the taxation of trusts.
What about CGT?
If the capital gains tax changes come into effect, it actually makes things more complicated. At the moment there’s no CGT on death, and the person inheriting an asset is treated as getting it at the market value as of the date of death. It means they may be able to sell it immediately and pay no CGT.
The report recommends that where an asset passed on death benefits from an IHT relief or exemption, different rules should apply. Instead of the cost of the asset resetting, it should be treated as having been given at the price when the person who has died acquired it. It means if they sell it straight away, CGT may be due.
Policies can and do change. The sooner you act the better.
There’s no guarantee these recommendations will come to fruition. But it goes to show that tax policies can change.
If you’re planning to pass on as much of your wealth as possible to your family, don’t put it off – get planning as soon as it makes sense for you. This can be a complicated area, so it’s one of those times in life when it’s worth considering getting financial advice.
Give us a call and we’ll first help you understand if you could be affected by IHT. And what you could do to reduce the impact. We won’t waste your time, or your money.
We’ll only recommend you meet a specialist financial adviser if it’s right for you. But we’re just as likely to simply reassure you or refer you to a solicitor or tax adviser if that’s better for you.
If it looks like we can help, we’ll book your free initial consultation with a specialist. There’s no pressure to take advice, but if you choose to there’ll be a charge, which we’ll discuss with you. No personal advice will be given during the initial consultation.
This article and guide aren’t personal advice. For tax calculations or technical queries please refer to a tax adviser.
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