The inheritance tax regime has been relatively stable for some years but one wonders how long this will continue to be the case. In its recent report, the Office of Tax Simplification has called for the system to be overhauled. The proposed changes include cutting the “seven-year rule” on lifetime gifts to five years and scrapping taper relief, which taxes gifts made between three and seven years before death on a sliding scale.
The main changes over the last decade or so have mainly been relieving measures. These include the transferable nil rate band from October 2007, the 36% tax rate where 10% of the death estate is left to charity from April 2012, and the residence nil rate band in April 2017. However, there has been a significant tightening up of the liability position of non- UK domiciled individuals.
Are there changes on the horizon for inheritance tax?
The time may be approaching when a Government seeks to introduce major reforms to the tax. Whilst inheritance tax receipts have soared to more than £5bn per annum, an 8% increase year on year, the legislation is perceived as overly complex and administration procedures are non-digital and require overhaul. A very small percentage of estates are liable to the tax. With sufficient time and expert advice, it is usually possible to plan away some or all of the latent liability. Certain aspects of the legislation, for example, 100% Agricultural Property Relief for let farmland and 100% Business Property Relief for shares quoted on AIM are perceived by some as unfair and inappropriate.
How soon reform will come is unclear. With Parliament seemingly stuck in “Brexit paralysis” it seems likely that the Government will not announce any major changes before autumn. How soon reform will come is unclear. With Parliament seemingly stuck in “Brexit paralysis” it seems likely that the Government will not announce any major changes before autumn. With Sajid Javid having taken over as Chancellor, the timing of the Autumn Budget is uncertain at the current time and may depend on whether the UK leaves the EU on 31 October and / or whether Boris Johnson calls a General Election.
Will the Labour Government replace inheritance tax with a new Gifts Tax?
On the Opposition side, the Labour Party has publicly called for inheritance tax to be abolished. It would be replaced with a Gifts Tax that would be levied on the recipient to the extent that the value of the asset acquired exceeds a Lifetime Allowance of £125,000. It is not clear whether it would be liable for income tax on the asset acquired which could mean income tax at marginal rates of up to 45% (or even the 50% top rate widely reported as being in Shadow Chancellor John McDonnell’s plans).
Consider taking action now
Given the febrile political climate, the looming Brexit deadline of 31 October and speculation of a General Election in the autumn, clients with substantial estates may wish to review their assets and consider whether they should undertake any immediate planning measures.
For example, lifetime gifts could be made either absolutely or into trust in order to “bank” the benefits of the current inheritance tax regime.
Inheritance tax feels like a tax that is ripe for reform and we suggest you take advice on your personal position from your usual Thomas Westcott contact or by speaking to our specialist Personal Tax team.
By Sheldon Cole, Partner