The Office of Tax Simplification (OTS) has recently undertaken a review on Inheritance Tax (IHT) as requested by the chancellor and has given the following recommendations on how to simplify it.
In their report the OTS made 11 recommendations which included the following;
- A reduction in the 7 year gifting rule to 5 years. At present gifts made within 7 years of death fall back into an individual's estate. It was deemed that the requirement of 7 years for executors to be going through the deceased's estate was excessive and in some instances impractical. A reduction to 5 years would mean that more gifts will escape exposure to IHT.
- Introducing a personal lifetime gift allowance. At present there is no limit or lifetime tax payable on a gift which qualifies as a potentially exempt transfer (PET).
- Reform the exemption for normal expenditure out of income or replace it with a higher personal gift allowance
- Simplifying the interaction between IHT and Capital Gains Tax (CGT). This may involve the removal of the re-basing of assets for CGT purposes upon death.
- Removal of Taper Relief for failed PET's. Taper relief is a largely misunderstood relief with only gifts above the nil rate band actually qualifying for taper in the first instance. The reduction in the 7 year rule to 5 years would most likely benefit more than those who lose out on taper relief.
- Consider whether it continues to be appropriate for the level of trading to be set at lower levels for Business Property Relief (BPR), than that for other Capital taxes such as Holdover Relief and Entrepreneur's Relief. At present for a business to qualify for BPR on death (an exemption from IHT), the business effectively needs to have a >50% trading requirement. It will be interesting to see if any amendment to this test makes BPR qualification more difficult by aligning qualification with the CGT rules.
- Review of the treatment of Furnished Holiday Lets and whether to align the IHT treatment to that of the income tax and CGT, where they are treated as a trade providing certain conditions are met. This would be interesting as at present HMRC's view is that in general Furnished Holiday Lets do not qualify for BPR.
One area where there was no proposal for simplification was the recently introduced Residence Nil Rate Band (RNRB). Ironically this is one of the most complicated areas of IHT and was possibly a missed opportunity to simplify the working of this relief to provide greater clarity for all.
In summary, these are only proposals, and the next step will be for them to be discussed, agreed, and then possibly in one form or another make it into legislation.
So whilst it is still early days, this does prove that the current IHT rules are being reviewed by HMRC, and we will be sure to keep you updated if and when the proposals become finalised and legislated.