A sweeping reform of inheritance tax has been recommended to cut the complexity of the so-called ‘death tax’. But, you’ll need to review existing estate planning if changes go ahead.
Headline recommendations to government from the Office of Tax Simplification (OTS) include changing the rules surrounding gifts of cash, property and other assets made while someone is still alive. The relationship between inheritance tax and capital gains tax for farm and business assets is also up for review.
- A simplification of the lifetime gift exemptions to a single personal gift allowance. Included, a revised threshold for small gifts and reform of the regular gift out of income exemption.
- The current 7-year gifting rule for potentially exempt transfers be cut to 5 years. This is the required period of time between the date a lifetime gift is made and the date of death, for the gift to be exempt from inheritance tax. This will end complicated rules on tax on gifts gradually reducing from year three of the current 7 year period.
- Where IHT is due on lifetime gifts, the rules on who is liable to pay the tax should be simplified. As should how the £325,000 threshold is allocated between different recipients.
Inheritance Tax and Capital Gains Tax – Businesses & Farms
Also in the spotlight for reform is the relationship between inheritance tax and capital gains tax in the reliefs available for businesses and farms. When it comes to passing on a farm or business, different tests are used depending on whether it’s done following death or during a lifetime. The rules are different for inheritance tax and capital gains tax.
Civil Partnerships & Inheritance Planning
Another factor to consider in any future inheritance planning is the government’s pledge to extend civil partnerships to opposite-sex couples. Currently out for consultation, the Government Equalities Office has said they hope that the option will be available by the end of 2019.
The right to enter into a civil partnership would give opposite-sex couples the same inheritance tax rights as those enjoyed by married couples and same-sex civil partners.
How to prepare for inheritance tax changes
If you have existing estate planning in place, we recommend speaking to a solicitor immediately. Wills may need to be re-written to benefit from any tax reform that takes place. Those with Wills drawn up based on current rules may risk a very different outcome to what was intended.
The OTS is the independent adviser on simplifying the UK tax system, making recommendations for government to consider and the consultation and subsequent reporting on inheritance tax were undertaken in response to a request from the Chancellor of the Exchequer in January 2018. The first report was published in November 2018, examining the administrative process, while the second report tackles how the tax is currently implemented.
Proposals put forward by the OTS in the first stage of their review of inheritance tax included simplified administration of the process, reducing or removing the requirement to submit forms for smaller or simpler estates, especially where there is no tax to pay, and looking to automate the system by bringing it online.
Posted on November 4, 2019