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Simplifying the design of inheritance tax

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10 July 2019
The Office of Tax Simplification (OTS) has been considering the simplification of IHT. It has now published its second report 'Simplifying the design of inheritance tax'.

The OTS received an unprecedented number of responses from the public, and IHT is seen as unfair and complex by many.

Although only applying to about 5% of deaths, the government now collects over £5 billion from IHT each year. However, a significant number of deaths leave a surviving spouse to inherit tax-free so the numbers are skewed.

The first report covered the administration of IHT and the latest report looks at the tax itself. The report excludes trusts as HMRC is already looking at changes to trust tax and also excludes the residence nil rate band because it is 'too new' and needs to bed in. 

The report's recommendations include some significant changes, which may or may not happen.  Some of the potential changes include:

1.      A single personal gifts allowance to cover lifetime gifts.
2.      A reduction in the potentially exempt transfer (PET) 7 year period to 5 years coupled with the abolishing of taper relief.
3.      Changes to the allocation of the nil rate band on lifetime transfers.
4.      The removal of the tax-free uplift for CGT on death where the assets qualify for a relief or exemption.
5.      An alignment of the trading activity level for BPR with the activity level required for CGT holdover and entrepreneurs’ relief.
6.      To allow BPR on furnished holiday lets where the trading conditions exist which allow the income and asset to be treated as trading for income tax and CGT. 
7.      Allow APR on farmhouse where a farmer leaves the farmhouse for medical treatment or to go into care.

Point 4 could have a significant impact on the overall capital tax planning where assets are passed to a surviving spouse who then gifts or sells assets using the tax free uplift for CGT and the PET exemptions.

The IHT position around Balfour style planning where non trading assets are included in trading businesses at a level below 50% of the overall activities could change overnight, therefore caution should be exercised with any current planning around this principle.  

There is no way of knowing if any of the recommendations will be implemented and without some certainty it is difficult to recommend introducing major changes to any existing IHT planning.  However, being prepared for change by understanding the current position and reviewing where changes might be suitable is a sensible way forward.    

Lucie Hammond - Associate Partner
Lucie Hammond
Associate Partner Contact details
Lisa Oliver - Associate Director
Lisa Oliver
Associate Director Contact details