Major changes to inheritance tax (IHT) are proposed by the government’s Office of Tax Simplification (OTS) which could alter your estate planning.
Inheritance tax is certainly complicated – especially for a tax that generates relatively little revenue. The OTS has spent some 18 months looking at it and has now produced two linked reports. The second and more important one, dealing with the structure of the tax, was published in July 2019, just as the man who commissioned it, Chancellor Phillip Hammond, was about to leave office.
“The latest OTS report contains a wide range of proposals that could have a big effect on your estate planning.”
You should only have to live for five years – not seven, as now – before a lifetime gift ceases to be subject to IHT. At the same time, the little-understood taper relief should also be abolished. This can reduce the amount of tax payable on lifetime gifts made more than three years before death, but it applies to relatively few estates.
The rules for IHT business property relief (BPR) should be brought in line with those for capital gains tax (CGT), which would result in fewer businesses qualifying for the relief. Alongside this change, the CGT rules at death should be reformed.
The current £3,000 annual exemption and the marriage/civil partnership exemption (up to £5,000 for parents) should be replaced with a new single ‘personal gifts allowance’. The OTS made no specific recommendation but it pointed out that the annual exemption would now be worth just under £12,000 if it had been inflation proofed since its last increase.
The level of the small gifts exemption (originally set at £250 in 1980) should be reconsidered. Again, the OTS made no specific recommendation but it did say that inflation-linking would have increased the amount to just over £1,000.
The rules for normal expenditure gifts should be reformed or should be replaced by a higher personal gifts allowance. This exemption is potentially valuable, but according to the OTS is regarded as confusing, difficult to claim and often not included in planning.
Pay-outs under term assurance policies should be free of IHT. Currently, it is necessary to write such contracts under trust to keep them out of the policyholder’s estate on death. Philip Hammond responded to the report by saying that “The government will consider the recommendations…and will respond in due course”. The new Chancellor Sajid Javid will probably echo his view, although in the short term his priorities are likely revolve around Brexit.
Like most reforms, the OTS proposals would create winners and losers. To understand which category you would fall into, and any pre-emptive actions that can be taken with your financial planning, please talk to us.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.
The Financial Conduct Authority does not regulate will writing, trusts and some forms of estate planning.
For specific tax advice please speak to your accountant or tax specialist.