Inheritance Tax (IHT) has been making headlines across the country this month with news of proposed changes to the tax. The HM Treasury ‘Office of Tax Simplification’ (OTS) published their review of IHT earlier this month and have suggested some changes for consideration by the Government.
When IHT is being discussed, you tend to find very few supporters of the so called ‘death tax’ with many viewing it as an unfair final levy that the Government has on your assets before your family receive them.
So what are the OTS suggesting as changes to IHT in their new report and how might this affect you if their proposals are implemented by the UK Government?
Currently an individual can gift up to £3,000 a year without it having any effect for IHT purposes. You can also make gifts of £250 every year to as many individuals as you wish. There are a few other specific exempt gifts like wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child).
The OTS has suggested that these allowances are hugely out-dated and should be increased or replaced with one much higher annual figure covering all gifts. The figures have remained the same since the introduction of IHT and it has been suggested that the figure should be at least four times the current £3,000 annual allowance now. If there was change in this area, it would be welcome news for tax payers, particularly with the increased role of parents and grandparents now providing cash gifts to allow younger generations to enter the property market.
The so called ‘7 year rule’ (where you must survive any gift you make by 7 years for it to be deemed as out with your estate for the purposes of calculating IHT on death) has also been earmarked for change. The report suggests that a new 5 year rule would be fairer, with the taper relief on any tax due being removed completely as well. This would be beneficial for those trying to gift on substantial assets as they would only have to survive 5 years from the gift to avoid paying any IHT on those assets. As Taper relief affects very few estates, on balance this proposal would be a welcome change and simplify this area as well.
The OTS is not suggesting any changes to the way that legacies are left to charities in Wills. Charitable legacies are currently exempt from paying IHT and the evidence in recent years has shown that awareness of this has led to increased charitable giving in individuals Wills across the UK.
The important point to note for individuals though is that there is no suggestion that the 36% IHT rate should be changed for those gifting 10% or more of their estate to charity. This is an effective tax planning tool for many who wish to leave part of their estate to charity.
Business Property Relief (BPR)
Many investors who hold shares on the Alternative Investment Market (AIM) may have been concerned in recent weeks with the mention of Business Property Relief in relation to the OTS report. AIM shares are currently exempt from IHT if the investment is in a trading company and the shares were held by the individual for more than 2 years before their death.
Trading companies who are listed on AIM have long been used as tax efficient investments by investors looking to reduce their potential IHT exposure. Unfortunately, the OTS look to be suggesting that as BPR operates mainly to help with the continuity of family ran trading businesses on the death of a family member, simply holding AIM shares as an investor does not meet the intention of this relief.
If the government agree with this, an alteration to the rules regarding AIM and BPR could be made. This would be a blow to some investors who may have structured part of their IHT planning using AIM investments and we shall have to keep an eye on developments in this area.
Term Life Insurance
Another slightly surprising suggestion made by the OTS is that term life insurance should be exempt from IHT. Ordinarily if individuals wish to avoid their life policy being subject to IHT they would have to write it into a Trust during their lifetime so that it was not deemed to be part of their taxable estate on death.
Simplification would be a sensible step and would prevent the estates of those who were not aware of the Trust route being penalised.
What is next?
The role of the OTS is to offer advice and recommendations to the Chancellor. Ultimately, it is then for the Government to decide how they wish to proceed and whether to implement any of the suggestions made in the report.
With the political landscape focussing its attention firmly elsewhere just now, I would not anticipate any quick decisions to be made in this area. As ever, it is sensible to be aware that changes may be coming in the not so distant future and we shall keep you updated on any resulting new legislation.
If it has been a few years since you consulted your Solicitor, a review of your Will and IHT planning is always sensible, and we would be happy to meet with you to inform you of developments in recent years and explore any new opportunities for you to take advantage of these.
Stuart Mackie is a Partner in our Private Client department. If you have any questions about Inheritance Tax Planning please contact Stuart on 03330 430150 or email firstname.lastname@example.org.