As the cost of Government support for those affected by the coronavirus continues to increase, talk inevitably turns to how it will be funded. Tax rises are an option but with Boris Johnson pledging not to increase income tax, national insurance and VAT there is perhaps limited opportunity. Inheritance tax (IHT) has been in the spotlight recently and this may be an area that changes.
In July 2019 the Office for tax Simplification (OTS) published its second report into IHT. The report made several recommendations including:
- Shortening the period before a lifetime gift becomes exempt from IHT from seven years to five years and abolishing taper relief.
- Review of lifetime gift exemptions, including gifts out of surplus income which are exempt when made.
- Remove the capital gains tax (CGT) base cost uplift that arises on death where an asset passes under an exemption e.g. inter spouse or subject to a relief e.g. business property relief (BPR) or agricultural property relief (APR).
- Aligning the trading test for BPR, currently wholly or mainly i.e. more than 50%, with CGT which is substantially, widely seen as 80:20.
- Treat furnished holiday lets as trading for IHT as well as for CGT and income tax.
In January 2020 the all party parliamentary group for Inheritance and Intergenerational Fairness published its report, The Reform of Inheritance Tax. The main recommendation from this report was to replace the current IHT regime with a tax on lifetime and death transfers of wealth, with very few reliefs and a low flat rate, likely between 10% and 20%. The CGT tax-free death uplift would be abolished.
The common theme from both is the removal of the CGT rebasing on death and at best reform and worst abolishing APR and BPR. For many, knowing that the farm can pass free of IHT and with the benefit of CGT rebasing on death, is a reason to hold on to it rather than passing it down a generation sooner. Who knows how much longer this will be the case?
While both these reports are a long way from becoming law, they highlight the potential direction of travel if IHT is reformed. For landowners and farming businesses the position would undoubtably be worse if these changes were implemented so now may be the time to act.
Succession planning is a process that takes time and needs buy in from all the family so the sooner that process begins the better. More details on the process of succession planning are here. Do get in touch if you would like to discuss the potential implications for you and options for succession planning.