The Office of Tax Simplification (OTS) has presented a report to Parliament pursuant to section 186(4) (b) of Finance Act 2016 for simplifying the design of Inheritance Tax (IHT). Within this report, the OTS has outlined 11 recommendations to provide clarity and consistency among various other taxes. These are summarised as below:
Annual gift exemption and gifts in consideration of marriage or civil partnership
Replace with personal gifts allowance and consider the level of this allowance
Seven year period for lifetime gifts
Reduce to five year period for lifetime gifts and abolition of taper relief
Need to take account of gifts made outside of the seven-year period (14-year rule)
Remove the 14-year rule
Complicated rules on liability for the payment of tax on lifetime gifts to individuals and the allocation of the nil rate band
Exploring options for the simplification of these rules
‘Capital gains uplift’ allows the person inheriting an asset at its market value on the date of death, rather than the amount originally paid for it.
Removal of ‘Capital gains uplift’ provision to promote passing on assets to the next generation during the lifetime
Generous business and agricultural property relief (BPR/APR) for trading and farming assets.
Complicated indirect non-controlling shareholdings in trading companies where BPR were identified.
IHT treatment of furnished holiday lets is not consistent with Income Tax and Capital Gains Tax.
Consider setting BPR at a lower level than that for the gift holdover relief or entrepreneurs’ relief.
Review the treatment of indirect non-controlling holdings in trading companies; and
Consider aligning FHL inheritance tax treatment of FHL with income tax and capital gain tax.
Inconsistent IHT treatment of corporate trading group of LLP and limited company as their holding vehicle for BPR purposes
Review the treatment to remove this inconsistency for the purpose of the BPR trading requirement
Eligibility of farmhouses for agricultural property relief (APR) in sensitive cases, such as where a farmer needs to leave the farmhouse for medical treatment or to go into care.
Review of the current approach for the eligibility of farmhouses for APR in sensitive cases
Valuation of a business or farm is required for BPR or APR relief.
A clarity is required for the valuation - whether this needs to be a formal valuation or an estimate
Death benefit payments from term life insurance are IHT free if written in trust.
Consider the death benefit payments are IHT free without the need of life insurance being written in trust
Pre-owned assets tax rules (POAT) and other IHT anti-avoidance rules to protect the revenue
Review whether POAT rules are functioning as intended and whether they are still necessary.
The following example elaborates the tax impact of ‘capital gain uplift’ abolishment should this proposal get implemented (please do remember that this a proposal):
Mr A is deceased on 15 May 2020, leaving a house (buy to let) worth £250k to his wife, Mrs B. Mr A purchased this house for £50,000 in 1998. As the asset is exempted or relieved from inheritance tax due to the spouse exemption, no inheritance tax is due on the death of Mr A.
With the current IHT rules, Mrs B acquires the house at the market value £250k; whereas under the proposed rules, she will be inheriting the house at the historic base cost of Mr A, ie £50,000.
Assuming Mrs B decides to sell the house on 15 March 2021, her capital gain calculation may look as shown below (assuming she is a higher rate taxpayer):