Could Inheritance Tax Be Changing Soon?

Inheritance Tax has long been a bone of contention for society. For most of us, it feels unfair and we’d love for it to be abolished, but for the government, it’s a huge source of revenue and a necessary tax on the transfer of assets.

So any changes to Inheritance Tax are always big news.

And it’s possible that changes could be coming soon, perhaps in the next Parliament.

That’s because earlier in the year, the government ordered an investigation into the way Inheritance Tax was currently applied. And in July, The Office of Tax Simplification (OTS) published their findings.

These findings are recommendations and considerations only.

It’s important to note that at this stage. The OTS does not make government policy. It cannot enforce changes. So anything in the report is, at this stage, simply a suggestion.

The recommendations made in the report could eventually become law, and the next government is likely to refer to the findings, but it will all come down to politics in the end.

But still, the report does shine a light on what changes we might expect in the future, detailing eleven key findings about how Inheritance Tax could be simplified.

Why is there a report to change Inheritance Tax?

Inheritance Tax is complicated. It’s full of complex rules and a wide range of technical issues that make it difficult to calculate what is owed. Requirements and exemptions are often unclear, and there’s a lot of anti-avoidance tactics too.  And it’s unpopular.

As the report says in its opening remarks:

“Inheritance Tax is often said to be unpopular and raises strong emotions, not least because it affects people only occasionally, in sometimes significant and surprising ways, and at a sensitive time.”

A simplified approach to Inheritance Tax could make it a lot easier for businesses, families and individuals to plan ahead and know what to expect when a loved one passes away.

What changes are being proposed?

The OTS report on Inheritance Tax focuses on three key areas for change:

1. Lifetime gifts, including liability for paying any tax due on such gifts
2. Interaction with Capital Gains Tax
3. Businesses and Farms

As a rural accountancy firm that works with a lot of farms and rural businesses, we’re especially interested in the third area of recommendations. But, the changes proposed to lifetime gifts could also affect many of our clients too.

Lifetime gifts

Gifts – usually from parents to their children or other individuals – are a big point of concern for Inheritance Tax, and often cause lots of problems. The OTS recommends a range of options that will simplify the process and reduce liability for individuals. It suggests:

• Having a single overall personal gift allowance to prevent confusion
• Increasing the gift allowance to a higher level to minimise Inheritance Tax owed
• Abolishing taper relief because it’s misunderstood
• Reducing the 7-year period on which Inheritance Tax is owed on gifts before death to 5 years
• Ignoring gifts currently made outside this 7-year period when calculating Inheritance Tax

Interaction with Capital Gains Tax

There’s a complex relationship between Capital Gains and Inheritance Tax when it comes to people inheriting assets.

Because of capital gains uplift, where assets are treated at the market value rather than the amount originally paid for them – and because some assets are exempt from Capital Gains Tax – it means that an asset can be sold shortly after death without any tax due.

In practice, this means that farmland or business properties are not passed onto the next generation and distorts succession planning.

The report recommends removing the capital gains uplift exemptions and treating asset acquisition at the historic base cost.

Business and farms

The report pays special attention to trading businesses and farming assets, because they often qualify for full relief from Inheritance Tax under business property relief (BPR) and agricultural property relief (APR).

Reliefs are important to help prevent the sale or break up of businesses or farms to pay for Inheritance Tax, but the findings suggest the level of trading activity and the different tests for different reliefs is complicated and distorts decision making for landowners/business owners.

While it doesn’t make any direct recommendations, it does suggest the government reviews:

• The appropriate levels of trading activity for BPR and APR
• How indirect non-controlling holdings and limited liability partnerships are treated
• The eligibility of farmhouses when a farmer goes into care
• The guidance of if and when valuations of farm estates are required

What do changes to Inheritance Tax mean for me?

At present, there aren’t any changes to Inheritance Tax rules and regulations. These are ONLY recommendations and suggestions.

If they did become law, then the chances are most individuals would find it a lot easier to understand and plan for any owed Inheritance Tax. They may also find they owe less with the changes, especially those made to the gift allowance.

For farmers and landowners, proposed changes could affect how their land and assets are taxed, and may increase their liability… but we think this unlikely.

Given that Brexit is dominating political discourse and a general election is likely to shake everything up, it’s highly likely we won’t see any major changes to Inheritance Tax until at least next spring.

We’ll keep you up to date with any new developments and policies as and when they’re announced.

In the meantime, if you do want to discuss any Inheritance Tax liability and succession planning with us – then get in touch here.