Inheritance Tax (IHT) To Be Simplified

The Office of Tax Simplification (OTS) has undertaken a detailed review of Inheritance Tax (IHT), which is perceived by many as a complicated tax. The government normally takes account of OTS recommendations and their report is likely to lead to future changes to the rules. We will of course keep you posted, as the changes may necessitate amending your will or further planning to pass on your wealth.

There are numerous misconceptions about how IHT operates, particularly in connection with gifts during someone’s lifetime. One of the proposed changes is to shorten the period for lifetime gifts to be exempt from 7 to 5 years. The OTS also recommended replacing the current £3,000 annual gift allowance, marriage allowances and the exemption for regular gifts out of income with a £25,000 personal allowance each year.

No Tax Free Capital Gains Tax (CGT) Uplift On Death

Although the OTS were tasked with simplifying IHT, they also considered the interaction with CGT as many asset transfers potentially have both CGT and IHT implications. Currently there is no CGT on assets transferred on death and the recipient inherits the asset at its market value.

It has been suggested that the CGT uplift on death distorts decision making relating to assets that benefit from an exemption from IHT. Where an individual holds such an asset that has risen in value, and is considering transferring it during their life, they are often advised to retain it until death rather than giving it away during lifetime, because of the tax benefits.

Where a business is retained until death, any potential capital gains are wiped out and there is no IHT to pay. This could lead to an asset being retained rather than being transferred to the next generation at the time that is right for the business.

We will again monitor the progress of this proposed change as it is likely to have significant implications on family business succession planning.