What are the proposed Inheritance Tax Changes?

A summary of the proposed Inheritance Tax changes plus our Director, James’ view

You may have recently heard about the proposed Inheritance Tax changes from main political parties. This is because the Office of Tax Simplification (OTS) has recently published its second report on how Inheritance Tax could be simplified. This was with a view to improve taxpayer understanding and experience of the tax.

We suspect the news is likely to be welcomed by many. Although it wouldn’t really be fair to suggest that there is any popular form of taxation, Inheritance Tax (IHT) is one of the types most disliked by the British public. This has not been helped by the fact that the amount of IHT paid in recent years has reached record highs of £5.4 billion.

It’s important to note that at present, the proposed Inheritance Tax changes are only recommendations in a report. They do not represent Government policy. The report was also commissioned by a Chancellor of the Exchequer who is no longer in office. Yet, it seems that everyone is in agreement that Inheritance Tax needs simplifying.

The report should give any incoming Chancellor something to think about. Although the likelihood of change will depend on the tax policy of the new resident of 10 Downing Street.

Inheritance Tax Changes  – the political impact

We know that Boris Johnson will lead the Conservative Party and be Prime Minister. But, the possibility of a general election with an unpredictable outcome creates uncertainty. It is safe to say that, in the event of a Conservative defeat, more radical tax change could be on the cards.

The political impact on the proposed Inheritance Tax changes. Boris Johnson at No. 10.

Subject to all that, what are the proposed changes? The key points being:

The introduction of a new personal gifts allowance

This will be at a level above the current £3,000 per year exemption. As a result, it will replace a wide range of small-gift exemptions. This includes the annual £3,000 exemption and the exemption for gifts related to marriage or civil partnership, for instance. The normal expenditure out of income exemption may also included.

A review of the normal expenditure out of income exemption

This will simplify the conditions and limit it to a percentage of income. Elimination of the normal expenditure out of income exemption is also on the cards. The proposed ‘expanded’ personal gift allowance would replace it in this case.

A reduction in the accumulation period for lifetime gifts from 7 to 5 years

So, gifts to individuals made more than five years before death would be exempt from IHT. An eradication of the difficult to understand taper relief may also take place.

The removal of the need to take account of gifts made up to 14 years before death

Tax will then be calculated on gifts made within 7 (or 5 years) of the givers death.

A review of how the nil-rate tax band is attributed

This will be in respect to lifetime gifts to different recipients. The intention is to improve fairness and simplicity.

A great alignment of the rules that qualify a business as a ‘trading’ business 

This is for IHT and capital gains tax purposes.

Capital Gains Tax (CGT) uplift to be removed

This is for IHT and CGT tax purposes. One of the most significant changes concerns CGT. It proposes the removal of the re-basing value of an asset for CGT purposes on death.

This will apply where there is no IHT on death due to relief or exemption. Examples include business relief or spouse/civil partner exemption.

The government would consider removing the CGT uplift in these circumstances. This means that the recipient inherits the asset at its historic base cost for CGT. Selling the inherited assets could result in significant CGT liabilities.

Term life assurance policies will also no longer need to be in trust because they will be outside the taxable estate of the policyholder. Note that the OTS did not suggest making changes to the residence nil-rate band or to the taxation of trusts.

One of the proposed Inheritance Tax changes include removing the CGT uplift

So, what do all these proposals and recommendations mean? Given the current political uncertainty – we would suggest not very much. With Brexit unresolved and bigger issues to be considered at No.10, adoption anytime soon seems unlikely. We may learn more from the next Budget towards the end of this year or, failing that, in the 2020 Spring Statement.

Our Associate Director, James Keane’s View

The existing rules prevail with all their vagaries and complications at present. Yet, IHT is referred to as voluntary tax and there are good reasons for this.

You can achieve a reduction on your IHT bill in many ways. All that are completely acceptable and above board.

Clients with cash and investments should plan with appropriate investments and trusts. This can deliver solutions that reduce tax. It can also provide the investor with control allowing them access to the funds if required.

There also exists the option to provide for IHT liability on death. This is through appropriate lift assurance held in trust so this is  worth considering.

Need more information?

If you would like more information about Inheritance Tax, then why not arrange a free consultation with one of our Financial Planners? Call 01244 347 583 or email us at: info@innesreid.co.uk.

You may also wish to view one of our recent client Case Studies. Mrs D approached Innes Reid at age 90 having undertaken very limited Inheritance Tax Planning. However, our professional advice saved her over £400k that would otherwise have gone to the taxman. Her story proves that it’s definitely better late than never when it comes to Estate Planning.

 

View Case Study: How we saved Mrs D £400k

 

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