Insights

Inheritance tax is under review currently, with the launch of a large consultation in which taxpayers as well as advisors are being asked to put forward their views. Always an emotive subject, inheritance tax is regarded as doubly unfair because it is a tax on assets that have already been taxed. Official receipts reached a record high level this year, with £5.2bn generated for the Treasury. A large factor behind this increase is clearly the value of property, since this is the most commonly held high value asset for the majority of people.

Chancellor Philip Hammond has now called for the current system to be simplified and made more transparent. The first phase of the consultation is open for feedback until 8 June 2018, and the final report is expected by the autumn Budget statement.

Possible changes to inheritance tax legislation in the UK

It is impossible to accurately predict what changes are likely but having reviewed all the reports circulating within the tax profession, some reasonable ‘educated guesses’ can be made.

Here are 7 of the most obvious areas to watch out for:

1. Increase the main nil rate band from the historical £325,000 level introduced in the 2009-10 tax year. Some increases have already been made, with the new additional nil rate main residence relief, but it has added an awful lot of extra (and unnecessary) complexity. Why not simply increase the main allowance and be done with it? A rise to a flat rate of £500,000 might be sensible.
2. Increasing the lifetime gift timeframe. Currently if you transfer assets using the potentially exempt transfer rules as a lifetime gift (without reservation) and survive the transfer date by 7 years, the assets fall completely outside your estate for inheritance tax purposes. This applies regardless of how much the assets are worth. Given that gifting is typically the backbone of most inheritance tax planning strategies, the 7 year timeframe could easily be increased to, for instance, 10 years. This would have a significant impact on tax revenues without further complicating the legislation. It would also potentially be politically popular as it could be argued that only the very wealthy can really afford to make large lifetime gifts of major assets.
3. Combining the different individual gift allowances into a single larger annual allowance – for instance it is currently possible to gift £3,000 a year which leaves your estate immediately, but also to make other contributions to living costs, weddings, birthdays and make charitable donations. Rather than have multiple categories, there could be a simpler flat rate similar to the existing capital gains tax allowance instead.
4. Changes to business property relief (BPR) rules. Currently, if you own a family business, it is possible to transfer it to family members to inherit without paying inheritance tax through the BPR exemption rules. However, it is also possible to invest in AIM listed companies and provided the shares have been held for 2 years, also apply the BPR rules and benefit from zero IHT. Some argue this latter rule is less fair and BPR should include only family businesses and unquoted companies.
5. Agricultural property relief may also be restricted and the tax relief available may no longer be so widespread.
6. Pensions may be overhauled, to limit the tax-free transfer rules. Currently, holders of defined contribution pensions who die before the age of 75 are entitled to pass their pensions onto their heirs without paying any tax.
7. Trusts may be further reviewed. These are already very complicated, and many people no longer consider trusts for inheritance tax planning because of the high costs of establishing and administering them, and the restrictions on the value of assets that can be passed to them tax free. However, there are many instances where a trust is beneficial to ensure assets are ring fenced and protected for a beneficiary. It is possible that a new type of trust might be introduced for these situations, with further restrictions added to the existing trust regimes in operation, making them even less tax efficient.

Our view

Overall, we believe that the government’s review of inheritance tax is a positive development as it will hopefully help to simplify an unnecessarily complex part of the tax legislation.

Clearly no one can predict what the final changes will be, but we can probably expect them to be significant and likely to impact a large number of people. Our advice to anyone concerned about inheritance tax is to talk to us and explore whether it would be prudent to do some initial tax planning now, before the consultation ends. Since changes are likely and we cannot be sure exactly when they will come into effect – in some cases, major changes have become operational on the actual Budget day – it may be worth considering some earlier action where appropriate, whilst there is still scope to do so.

If you would like to take part in the consultation, you can do so online via www.gov.uk/ots

For more information about tax planning, please contact Lesley Stalker by emailing partners@rjp.co.uk.