In July the Office of Tax Simplification (OTS) published its long-awaited second report on inheritance tax simplification. It contained a range of useful proposals.
The report, which focused on simplifying the structure of inheritance tax, contained some surprises, not only in the recommendations it makes, but also in those areas it has left untouched.
The OTS suggests that the annual exemption (£3,000 since 1981) and the wedding gifts exemption (a maximum of £5,000 and a minimum of £1,000, unchanged since 1975) should be combined into a single ‘personal gift allowance’. While no specific number was proposed for the new allowance, the OTS did note that the annual allowance would be £11,900 in 2019/20, had it been inflation proofed.
Currently you need to survive seven years for any lifetime gifts not to form part of your estate on death and, in some instances, gifts made up to 14 years before death could affect the level of tax payable. The OTS says that only gifts made within five years of death should be relevant. That sounds like good news, but there is a sting in the tail: the OTS wants to scrap taper relief, which currently reduces the tax payable – if any – on gifts made more than three years but less than seven years before death.
While the paper discusses the criticisms received about the complexities of the relatively recent residence nil rate band (RNRB), the OTS says it is too early to propose any changes. However, it does quote an HMRC estimate that for the same tax cost, scrapping the current £150,000 RNRB would only allow the main nil rate band to be increased by £51,000.
The OTS paper discusses the availability of 100% business relief for holdings of AIM shares, but to the surprise of some does not propose the relief’s withdrawal. However, it does make some recommendations about business relief generally and its twin, agricultural relief, which could have a major impact.
The OTS report will now be considered by the (new) Chancellor. What changes Mr Javid puts through will in part depend upon parliamentary arithmetic and for how long the government survives. In the event of a Labour Party win in a potential general election, IHT could be replaced by a much harsher lifetime gifts tax. All of which means that if you are thinking about estate planning, consider taking advice sooner rather than later to ensure that any gifts you make are made tax efficiently.
Keep an eye on our blog for further updates.