Any changes will surely spell good news to some and bad news to others.
Even though more estates are now paying inheritance tax, few people clearly understand the rules and even those who do, often do not take adequate steps in order to prevent their families paying more than they otherwise may have to.
Last year the chancellor commissioned the Office of Tax Simplification (OTS) to review the tax and report back with proposals “to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible”.
Amongst the Office of Tax Simplification reports were some interesting proposals that would aim to simplify the current charges and reliefs. However, whether or not any of these will be implemented remains to be seen.
Here are some of the more notable recommendations:
1. A change to the ‘seven year’ rule
IHT is currently charged on estates worth more than the £325,000 nil rate band. However, you can make lifetime gifts of £3,000 a year without paying IHT and unlimited gifts of up to £250 to other people. Parents can give £5,000 towards the cost of a child’s wedding. Grandparents and great grandparents can each gift up to £2,500 for the same purpose.
Any further gifts are subject to the full rate of IHT if they were made in the three years before death, while those given three to seven years before death are taxed on a sliding scale known as taper relief.
The OTS has recommended that the seven-year period on gifting should now be cut to five years. It also suggests that taper relief is abolished, though it acknowledged this would create a “cliff edge” at the five-year point, where just one day would make the difference between paying 40% tax and nothing at all.
|Time between gift and death||Current tax charge||Tax charge under OTS proposals|
|Less than 3 years||40%||40%|
|3 to 4 years||32%||40%|
|4 to 5 years||24%||40%|
|5 to 6 years||16%||0%|
|6 to 7 years||8%||0%|
|7 or more years||0%||0%|
2. An ‘expanded’ personal gift exemption
The OTS has proposed that the various exemptions for smaller gifts should be replaced with a higher personal gifting allowance. While the body did not recommend a level for such an allowance, it noted that the £3,000 annual exemption has been frozen since 1981 and would now be £11,900 had it risen in line with inflation.
3. A review of the normal expenditure out of income exemption
The OTS has recommended a simplification to the ‘normal expenditure out of income’ rule, limiting the amount covered by the exemption to a fixed percentage of income. It suggests the exemption could even be abolished and replaced by the proposed ‘expanded’ personal gift exemption.
4. Removal of rebasing
Currently, the value of assets passed to a surviving spouse or civil partner on death are ‘rebased’ for Capital Gains Tax purposes. The report suggests capital gains should be passed down and calculated based on the historic price the deceased paid for the asset.
5. Residence nil rate band
The residence nil rate band provides couples with an exemption of a further £150,000 each on the transfer of a family home on death. But this puts several groups at a disadvantage. For instance, the allowance is only available for those leaving a residence to direct descendants which includes children and step-children (and their children), but not, for example, nieces and nephews or siblings. Therefore the OTS suggests there should be a review of the current rules.
The question now is whether the proposed changes are likely to see the light of day. Technical Connection joint managing director Tony Wickenden notes the OTS report was “commissioned” by the current Chancellor, so deserves to be taken seriously. But he adds that the recommendations do not yet represent government policy.
“Especially with Brexit unresolved, imminent consideration and adoption seems unlikely. We may get an indication of the direction of travel at the next Budget towards the end of this year, or failing that, with talk of Emergency Budgets, in the 2020 Spring Statement.”
“Even if every one of the proposals were implemented through appropriate legislation, IHT would still represent a meaningful tax that we know has the propensity to generate strong feelings among those affected by it. That is certainly the case as the tax stands at present.”
“Safe to say that in the event of a general election, anything other than a Conservative victory could mean that more radical tax changes are on the cards,” says Wickenden.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances. If you are unsure of where you stand with regards to IHT, you can try our IHT calculator or get in touch with us to speak to an advisor.