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
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:
the annual gift exemption and the exemption for gifts in consideration of
marriage or civil partnership with an overall personal gifts allowance
the level of this allowance and reconsider the level of the small gifts
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:
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
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
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:
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
the treatment of indirect non-controlling holdings in trading companies, and
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.
Emily Deane TEP, STEP Technical Counsel