While, we’re still in the midst of the noise from the leadership contest and Brexit, if you had your ears close to the ground, you might have noticed that the Office of Tax Simplification (OTS) recently released a (much needed) report urging for the simplification of our current Inheritance Tax (IHT) system. The main headline proposing decreasing the IHT period from seven to five years and scrapping the tapering currently available to reduce the amount chargeable after three years.
On the outlook this is welcome news, but what else has been proposed?
Lifetime gifts – who pays the tax bill?
Currently, the tax bill rests with the recipient of the gift, when calculating the tax-free Nil Rate Band available on death. However, the report has suggested that there should be an exploration of alternative options. This move will please many, as the current rules are not widely understood and can end up with people unknowingly leaving legacies in proportions, which were unintended.
IHT gift exemptions
In the proposal, there will no longer be a myriad of IHT gift exemptions instead they will be combined into one, easier to understand, annual personal gift allowance. While, yes, this simplifies IHT, it may also become a tax raising measure if a consequence of this is a reduction in the amounts of gifts that can currently be made out of income, free of IHT, for individuals with substantial surplus income.
The not so good
Capital Gains Tax (CGT)
The report also recommended removing the automatic right to rebase assets to market value for Capital Gains Tax (CGT) purposes on death when certain exemptions apply, such as spousal exemption or business property relief, by allowing it only where IHT is paid. What does this mean? If this potentially regressive change were implemented, it would encourage families to pass on their assets to the next generation much quicker, as there will be no benefit from passing these on through the death estate anymore.
Overall, the Office of Tax Simplification report, has definitely made some bold recommendations to simplify IHT, with some measures that will be greatly beneficial to those who have assets to pass down to generations. But let’s not get too excited yet, they are only recommendations of an independent body tasked with thinking of ways to simplify the IHT system, and must now be considered by Government who could agree or reject any number of them.
However, while, it is too early to consider any planning based on the OTS recommendations, we’ll continue to follow debate and keep you updated. Are you thinking about handing down your assets and not sure how to navigate Inheritance Tax? Get in touch with one of our personal tax specialists by filling out the form below.