QUESTION: A shake up of the rules on inheritance tax (IHT) has been proposed. The changes hope to reduce the complexity of IHT, tackle the unnecessary and complex form filing required when someone dies and also reduce the burden of tax on bereaved families. What changes have been proposed?
ANSWER: The Office of Tax Simplification (OTS) released the second part of its investigation into simplifying IHT in July following an unprecedented level of response from the public. The report recommends sweeping changes to many of the archaic rules and we now await government response.
IHT was introduced in 1986 and applies primarily on death, but also applies to some gifts made within seven years of death. Not everyone is required to pay IHT as the first £325,000 of an estate is tax-free. In addition, if a home is bequeathed to the next generation or to a grandchild, the estate can be valued at up to £475,000 before a person falls within the IHT trap.
Last year IHT raised £5 billion in tax from approximately 24,000 estates, but over 270,000 estates were required to complete IHT paperwork. Estates which fall within the scope of IHT often face an enormous tax charge as the rate is 40 per cent. Consequently, many families use complex gifting and taxation rules to try and circumvent a tax charge, particularly middle-income families who often fall within the IHT net due to the growth in house prices over the last quarter-century.
The OTS have put forward a number of recommendations regarding possible improvements to IHT. They focused their review on the administrative issues within IHT, looking at how the current gift rules and tax reliefs interact with the wider IHT system and whether the current framework causes any distortions to tax payers’ decisions and actions. A brief summary of some of their main recommendations are as follows :-
1 It has been suggested that the myriad of existing IHT gift allowances should be replaced with one single allowance per person. The current allowances are believed to be out of date and many believe that with careful tax planning they can be used by the super-rich, who have very high levels of regular income, to easily dodge the tax.
2 The OTS recommend that legislation should be amended to reduce the period before death in which gifts can be made, without being liable to IHT at death, from 7 years to 5 years and abolish the tapered rate of IHT altogether. They also suggest that the rules on lifetime gifting of wealth before death should be reviewed and simplified as many people don’t seek advice before giving away assets and few - other than specialists – appreciate the complex rules which apply.
3 The current rules allow a beneficiary to inherit a valuable capital asset which has increased significantly in value since its original acquisition and then subsequently sell the asset completely free from capital gains tax. The OTS have suggested that the existing CGT tax free uplift on death rules should be removed if no IHT is payable on the death.
4 There are currently several IHT exemptions available which allow businesses and farms to be passed on to the next generation tax free. The OTS has made suggestions to update and simply these tax reliefs and prevent reliefs such as Business Property Relief and Agricultural Relief from being used to avoid paying IHT on assets which are not directly connected with passing on a family business.
5 The new proposals also recommend that death benefit payments from term assurance policies should be free of IHT on the death of the insured life without the contract having to be written in trust. Currently, any payments from a term life insurance policy are only exempt from IHT if the policy is written into a trust, which many aren’t.
6 It is also proposed that a deceased’s estate should be liable for paying the IHT on gifts made prior to death, so that recipients aren’t caught out unexpectedly. At present the recipient of a gift is primarily liable for an IHT charge which may become due later. Few are aware of this rule.
There is no doubt that the UK IHT system needs reform. Current legislation struggles to deal with the super-rich who, with judicious planning and the ability to give wealth away during their lifetime, often pay a disproportionate amount of IHT in comparison with less wealthy individuals. We await the Chancellor’s response to the recommendations of the OTS, though given the current political climate, future legislation seems as likely as it is unpredictable.
:: Janette Burns (j.burns@pkffpm.com) is associate tax director at PKF-FPM Accountants Limited (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
