Making Inheritance Tax simpler for taxpayers?July 17, 2019
The Office of Tax Simplification (OTS) is an independent office of HM Treasury that advises and makes recommendations to the government with a view to make UK tax simpler for the taxpayer.
The OTS published a report on 5th July suggesting amendments to making inheritance tax simpler and more structured.
Inheritance tax is a tax payable on death. The amount of tax payable will depend on the value of the estate of the deceased after debts have been paid. Inheritance tax is also payable on some lifetime gifts.
Some of the recommendations made by the OTS are well received but others can create more confusion. We discuss them below.
Lifetime gifts are made during an individual´s lifetime, as opposed to gifts made in a Will.
At present, gifts made in excess of your Inheritance Tax allowance to individuals three to seven years before death are taxed on a sliding scale known as ‘taper relief’ and the percentage of tax payable will vary depending on the years between the date when the gift was made and death. Most gifts made more than seven years before death are likely to be free of inheritance tax. These gifts are known as 'potentially exempt transfers'.
These gifts require personal representatives (executors and administrators) to go through the deceased's finances to find out if any gifts were made in the seven years before death and, if any, establish their value.
The OTS indicated that this seven-year period can be too long and acknowledged the difficulties that some personal representatives may encounter to obtain financial records going back seven years. As a result, the OTS recommended reducing the seven-year period to five years. Therefore, gifts made to individuals more than five years ago will be exempt from inheritance tax. This proposal is welcome since it means that individuals will be able to gift sums of money free of inheritance tax if they survive for five years rather than seven.
However, the OTS has also recommended that taper relief is abolished. This will mean that gifts made three to four years before death will not have any inheritance tax deduction, therefore only gifts made five years before death will benefit from inheritance tax exemption. The OTS has also proposed the removal of the exemption for gifts out of excess income (after the deduction of normal expenditure).
Capital Gains Tax
No Capital Gains tax are payable on assets owned at the date of death. However, a beneficiary inheriting an asset, such as a property, may have to pay Capital Gains tax.
Under the current legislation, married couples and civil partners can leave their assets to each other, including their main property, in a tax-efficient way. The surviving spouse can then inherit the property without incurring any inheritance tax, due to the spouse exemption. It is also possible to inherit a property without incurring any capital gains tax, since the value of the property for capital gains purposes will be the market value at the date of death, rather than the purchase price when the property or the asset was first acquired. The advantage of this is that no capital gains tax should be incurred if a property is sold shortly after death.
The OTS has recommended that, in cases where an exemption from inheritance tax applies, such as the spouse exemption mentioned above, the value of the asset or property inherited should be the amount originally paid (as opposed to its value at the date of death) for capital gains tax purposes. This will no doubt increase the amount of capital gains tax payable when disposing of or transferring assets (especially buy to let properties and stock market based investments) and this will also need to be considered when drafting a Will.
The OTS does not have power to implement these changes and therefore these are merely recommendations. If the government agrees with these suggestions, they will need to be approved by parliament. It is very likely that nothing will change for the foreseeable future but we live in uncertain political times. If we see a Jeremy Corbyn led Labour government, Inheritance Tax is likely to change with the introduction of a punitive lifetime tax charge.
Whilst we welcome some of the recommendations, such as reducing the seven-year period to five years, others could lead to more confusion and careful planning (especially buy to let properties and stock market based investments) will be required as they have a profound impact on inter-generational gifting.
How can we help?
Our Private Client department offers Wills, Probate, Tax & Trusts services, including making a Will, creation of trusts to protect assets, Powers of Attorneys and Inheritance and Tax planning.
If you have any questions or would like to find out more about how we can help, please contact a member of the team who will be happy to assist.