The UK Office of Tax Simplification (OTS) has published a second report following its ‘Inheritance Tax Review: Call for Evidence’ published in April 2018.

The first part of the review focused on inheritance tax (IHT) forms, administration and guidance and the OTS published their response in November 2018.

The second part of the review focuses on various areas of the IHT regime and how they interact with one another. The report, published on 5 July 2019, contains three areas of recommendations for the simplification of inheritance tax: lifetime gifts; interactions with capital gains tax (CGT); and businesses and farms in relation to agricultural property relief (APR) and business property relief (BPR).

STEP is very keen to see the inheritance tax regime simplified due to complexities in the current system, so any proposed simplification is to be welcomed. However, we are disappointed to note that there are no recommendations in relation to the nil-rate band, the residence nil-rate band or the treatment of trusts. We believe that the government could expand upon these recommendations and look at a wholesale change in policy towards IHT.

The summary of recommendations on page 13-14 are as follows.

Key area 1: Lifetime gifts

Gift exemptions package

1. The government should, as a package:

• replace the annual gift exemption and the exemption for gifts in consideration of marriage or civil partnership with an overall personal gifts allowance
• consider the level of this allowance and reconsider the level of the small gifts exemption
• reform the exemption for normal expenditure out of income or replace it with a higher personal gift allowance

Gifting period and taper package

2. The government should, as a package:

• reduce the 7 year period to 5 years, so that gifts to individuals made more than 5 years before death are exempt from Inheritance Tax, and
• abolish taper relief 

3. The government should remove the need to take account of gifts made outside of the 7 year period when calculating the Inheritance Tax due (under what is known as the ’14 year rule’).

Liability for payment and the nil-rate band

4. The government should explore options for simplifying and clarifying the rules on liability for the payment of tax on lifetime gifts to individuals and the allocation of the nil-rate band.

Key area 2: Interactions with Capital Gains Tax

5. Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.

Key area 3: Businesses and Farms APR/BPR

6. The government should, as a package:

• consider whether it continues to be appropriate for the level of trading activity for BPR to be set at a lower level than that for gift holdover relief or entrepreneurs’ relief
• review the treatment of indirect non-controlling holdings in trading companies, and
• consider whether to align the Inheritance Tax treatment of furnished holiday lets with that of Income Tax and Capital Gains Tax, where they are treated as trading providing that certain conditions are met

7. The government should review the treatment of limited liability partnerships to ensure that they are treated appropriately for the purposes of the BPR trading requirement.

8. HMRC should review their current approach around the eligibility of farmhouses for APR in sensitive cases, such as where a famer needs to leave the farmhouse for medical treatment or go into care.

9. HMRC should be clearer in their guidance as to when a valuation of a business or farm is required and, if it is required, whether this needs to be a formal valuation or an estimate. Other areas of Inheritance Tax.

10. The government should consider ensuring that death benefit payments from term life insurance are Inheritance Tax free on the death of the life assured without the need for them to be written in trust. 

11. The government should review the POAT rules and their interaction with other Inheritance Tax anti-avoidance legislation to consider whether they function as intended and whether they are still necessary.

Useful links

• The OTS Inheritance Tax Review paper and STEP’s response to the consultation can be found here: https://www.step.org/consultation-tracker/2
• OTS first report published November 2018: https://www.gov.uk/government/publications/office-of-tax-simplification-inheritance-tax-review
• OTS second report published July 2019: https://www.gov.uk/government/publications/ots-inheritance-tax-review-simplifying-the-design-of-the-tax

Emily Deane TEP, STEP Technical Counsel