Back in January 2018 the then Chancellor of the Exchequer Philip Hammond called for a review of taxation and the first report was published in November that year.
Since then we have now had the 2nd report into Inheritance Tax (IHT). The review was undertaken by the Office of Tax Simplification (OTS).
The key recommendations were:
-Replace the current multiple system of gift exemptions with a single lifetime personal gift allowance, set at a sensible level;
-Reform the exemption for normal expenditure out of income or replace it with a higher personal gift allowance;
-Reduce the period during which lifetime gifts may become subject to IHT from seven years to five years, but abolishing taper relief; and
-Remove the capital gains tax (CGT) base cost uplift if an IHT relief or exemption applies on death.
Reducing the seven-year period to five years is a major positive step however scrapping taper relief could cause some concern, given that it creates a five-year cliff edge scenario. Currently with taper relief, if an individual dies within three years of a gift, the full amount of IHT is payable, and if death is within four to seven years there are tapered amounts to pay.
The CGT change is a little more complex. Currently when someone inherits an asset, the asset is valued at the date of death. However, CGT is not actually payable on death and any gain on behalf of the deceased is effectively wiped out for CGT purposes. The OTS believes that this complicates things and can cause people to delay business succession and so make decisions that are tax-driven rather than for commercial reasons.
As a result, the OTS wants the government to consider amending the rules so that, if an IHT relief or exemption applies, the recipient is treated as acquiring the asset at the historic base cost of the person who has died. This would be a massive shift for business planning in particular.
As part of the review the OTS has also looked at the use of AIM portfolios, trusts, life cover and pension planning. These are all useful tools when looking to mitigate inheritance tax. It doesn’t actually make any high level recommendations here but there are areas that clearly will be investigated further.
So what next? There’s no obligation for the government to act on these recommendations – it’s up to government and parliament to decide on this. We will of course be closely monitoring the situation for our clients.
