Malcolm Finney looks at some of the proposals by the office of tax simplification for the reform of the inheritance tax regime.
The office of tax simplification (OTS) produced its second report on its review of inheritance tax (IHT) in July 2019. This article takes a look at some of their proposals: a reduction in the potentially exempt transfer (PET) regime’s seven-year period, including the abolition of taper relief for gifts; amending the rules on allocation of the nil rate band (NRB) to lifetime gifts; combining the lifetime gift exemptions into a single allowance; and removing the need for trusts and life policies.
One of the proposals also considers aligning the inheritance and capital gains tax provisions and abolishing the uplift on death for capital gains tax.
Seven-year PET period
The OTS recommends that PETs made more than five years prior to death should be exempt, whilst at the same time abolishing taper relief. Whether these two proposals are on balance more or less attractive to taxpayers is difficult to gauge, but I suspect the loss of taper relief is not outweighed by the reduction from seven to five years.
The OTS also recommends that the so-called ‘14 year trap’ for gifts be removed by simply removing the need to take into account gifts made outside the prior seven-year period. This proposal would simplify calculations and is an area not well understood by many taxpayers or professional advisers.
Allocation of the NRB
Currently, the NRB is allocated on a ‘first come, first served’ basis (i.e. it is allocated to the earliest lifetime gifts first).
Thus, assume a person makes three PETS each of £162,500 to A on 1 July, B on 2 July, and C on 3 July, and dies within the seven-year period. Under the present rules, A and B each escape any IHT charge, whereas C faces a charge of 40% of £162,500. Is this fair? Under the new proposals, the NRB (i.e. £325,000 for 2019/20) would simply be allocated equally across each gift (i.e. £108,333 to each gift, thus spreading any IHT charge equally).
On the face of it, the proposals do not seem unreasonable until it is appreciated that it then becomes impossible to ascertain the quantum of any IHT charge on a gift at the time of making it. Thus, neither A, B nor C in the above example would know their potential exposures until the donor has died.
Lifetime exemptions
There is a myriad of exemptions (e.g. annual exemption; marriage exemption; normal expenditure out of income exemption). The OTS suggests there should be a review of the amounts of some of these exemptions (as they have certainly not kept pace with inflation), possibly combining some of them in some manner.
However, with respect to the normal expenditure out of income exemption (i.e. an exemption currently without limit and widely utilised), the OTS suggests a fixed amount of £25,000 per annum. It is suggested that this particular proposal is very unlikely to be well received by taxpayers.
Life policies and trusts
It is reasonably well known that life policies need to be settled on trust if their proceeds are to fall outside the estate of the life insured.
The OTS feels that life policy proceeds on death should simply be exempt, without the need to involve trust arrangements.
Practical point
Whether all or some of the OTS’ proposals will ever become law (and if so, when) is impossible to predict. Times, circumstances, and governments change, which makes predictions with accuracy virtually impossible. Suffice it to say that advisers should at least be aware of the OTS’ recommendations and, where appropriate, review the likely impact (good or bad) on relevant clients.
