Those with good memories might recall these initiatives...
January 2018 - the Chancellor (Philip Hammond) asked the Office of Tax Simplification (OTS) to carry out a review of Inheritance Tax (IHT).
November 2018 - HMRC issued a consultation setting out the government’s thinking on making trusts fairer, simpler and more transparent.
Both these ‘projects’ are very important in the world of financial planning, so let’s check-in to consider how each has progressed.
Review of IHT - where are we with this?
In November 2018, the OTS issued its first of two reports focusing on administrative aspects. This First Report reflected on the fact that although less than 5% of estates pay IHT, executors must complete IHT forms for half of all deaths. So, the key administrative recommendation was for the government to simplify this by giving renewed consideration to digitising and simplifying the necessary administration.
The second report published in July 2019 explored the main complexities and technical issues arising under the IHT rule book. That stretched to more than 100 pages with 11 recommendations split across 3 key areas
Interaction with Capital Gains Tax (CGT)
Businesses and Farms
I think these five recommendations are of particular interest.
1) Lifetime gift exemptions
The exemptions for annual gifts and those in consideration of marriage should be replaced with an overall personal gifts allowance. The small gifts exemption (£250) should then be reconsidered once the personal gifts allowance has been set. The normal expenditure out of income exemption should be reformed or replaced with a higher personal gift allowance.
2) The seven-year / fourteen-year clock and taper relief
The seven-year gifting clock should become a five-year clock. Taper relief and the fourteen-year rule should both be consigned to the scrap heap.
3) Interaction with Capital Gains Tax (CGT)
Where a relief or exemption from IHT applies (e.g. relief for Business Property) the government should consider removing the CGT uplift and instead treat the recipient as acquiring the asset at the historic base cost of the deceased.
4) Businesses and farms
The government should consider whether it is appropriate that the level of trading activity for Business Property Relief is currently set at a lower level (50%), than the 80% for CGT Holdover or Entrepreneurs’ Relief (now Business Asset Disposal Relief). Also, should the IHT treatment of furnished holiday lets be aligned with that of Income Tax and CGT?
5) Term Assurance
The government should consider ensuring that death benefit payments from term life insurance are IHT free on the death of the life assured without the need for them to be written in trust.
Review of IHT - Next Steps?
The ball is in Rishi Sunak’s court.
Trusts consultation – where are we with this?
The consultation period ended on 28 February 2019. For those who wanted to engage with the consultation there were nine consultation questions.
If I had to pick one question which attracted the most attention from a mainstream financial planning perspective then it was question six.
“The government seeks views and evidence on the case for and against targeted reform to the Inheritance Tax regime as it applies to trusts; and broad suggestions as to what any reform should look like and how it would meet the fairness and neutrality principle.”
Trust consultation – next steps?
We’re still waiting for a response document indicating whether the government is minded to propose any specific changes based on the suggestions received. If so, there will be further consultations on detailed proposal at that point.