Time for an overhaul of Inheritance Tax?

Inheritance Tax (IHT) has long been one of the biggest headaches of the UK tax system. Over the years, it’s become increasingly complex with layers of new rules making it ever more difficult for families to navigate.

Last week, the Office of Tax Simplification (OTS) released a report detailing its recommendations to the Government for reforming the IHT system and with a view to making it ‘simpler, more intuitive and easier to operate.’

The general discontent felt by taxpayers is perhaps highlighted by the fact that the OTS received more responses to its request for views and opinions on IHT than any other review it has carried out. We’ve summarised some of the key points of the OTS report along with our thoughts on them…

Reducing the seven year rule

This will dramatically cut-down the admin burden of keeping records. Particularly as banks and most other institutions normally delete documents such as statements that are more than six years old, which makes it very difficult for executors to track down what gifts – if any – have been made.

Abolish taper relief

This could be detrimental to those that have made large lifetime gifts. Currently, the tax on gifts made three to seven years before death are reduced on a scale known as taper relief. However, if combined with a reduction of the seven year rule, this could be acceptable as it won’t be necessary for the individual to survive the gift by as long.

Overhaul of the gift exemption package

Given that the amount an individual can gift has been frozen for over 35 years, this is seriously needed. The OTS has suggested some of the allowances and exemptions should be replaced with an overall personal gifts allowance. Since the variety of lifetime gifts is widely misinterpreted a single personal gift allowance would be far simpler for taxpayers.

Removal of Capital Gains Tax uplift

There is currently a great deal of complexity in the interaction between IHT and Capital Gains Tax. This suggestion involves the removal of the Capital Gains Tax uplift on the acquisition of an asset on death where a relief or exemption from Inheritance Tax applies as the Government feels this leads to double non-taxation. This would be a significant change to the existing system and could have a detrimental impact on beneficiaries.

Rules regarding Business Property Relief

This involves tightening the rules regarding the appropriate level of trading activity required for Business Property Relief, as it is currently easier to obtain IHT relief than the equivalent Capital Gains Tax reliefs for trading entities such as Entrepreneurs’ Relief and Gift Holdover relief. This would certainly be a simplification but undoubtedly one in the Government’s favour.

Relaxation of the rules for furnished holiday lets

This slight relaxation of the rules will bring the IHT treatment of furnished holiday lets in line with Income Tax and Capital Gains Tax, which in turn will assist in making this determination far easier. It will probably also result in more businesses qualifying for relief.

Agricultural Property Relief review

This is a review of the eligibility of farmhouses for Agricultural Property Relief in sensitive cases i.e. if a farmer needs to leave the farmhouse due to requiring medical treatment or needing to go into care. Relaxations in this area would be very welcome.

A good start, but more to do…

Overall, the recommendations by the OTS are a step in the right direction in terms of simplifying IHT for taxpayers. However, the report is missing a number of key points including any recommendations in relation to the nil-rate band (which has been frozen since 2009) and the treatment of trusts. Whilst it’s definitely a good start, there is much more needed.