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Office of Tax Simplification (OTS) issues second report into simplifying the design of inheritance tax

On Friday 5 July 2019 the OTS released the second report in relation to its inheritance tax (IHT) review: ‘Simplifying the design of inheritance tax’.

The report, which spans 103 pages, focuses on 11 recommendations:

  1. Replacing the gift exemptions and ‘normal expenditure out of income’ with an overall (increased) personal gifts allowance.
  2. Reducing the ‘seven-year clock’ to five years and abolishing taper relief.
  3. Removing the requirement to take into account gifts made outside of the seven (or five) year period, where the deceased made a chargeable lifetime transfer more than seven years before their death, followed by a potentially exempt transfer within seven years of the first gift.
  4. Simplifying the rules regarding who is responsible for the payment of IHT on lifetime gifts and the allocation of the nil rate band.
  5. Where a relief or exemption from IHT applies, to consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.
  6. In relation to business property relief (BPR), to consider whether the required level of trading activity remains appropriate, review the treatment of indirect non-controlling holdings in trading companies and to consider whether to align the IHT treatment of furnished holiday lets with that of income tax and capital gains tax (so that they are treated as trading providing that certain conditions are met).
  7. Reviewing the treatment of trading groups for BPR purposes where a Limited Liability Partnership (LLP) is used as the holding vehicle.
  8. Reviewing the current approach around the 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.
  9. Be clear in guidance as to when a valuation of a business or farm is required and, if so, whether this needs to be a formal valuation or an estimate.
  10. To consider ensuring that death benefit payments from term life insurance are IHT free on the death of the life assured, without the need for them to be written in trust.
  11. Reviewing the pre-owned assets tax (POAT) rules and their interaction with other IHT anti-avoidance legislation to consider whether they function as intended and whether they are still necessary.

Grandfather with his Granddaughter on the Coast

As part of its call for evidence, the OTS received comments of concern regarding the complexity of the residence nil rate band. While the OTS has invited the Government to consider reviewing this area of policy, due to its relatively new introduction (on 6 April 2017), it has not provided any recommendations at this stage.

Other comments were that the IHT regime for trusts is too complex and the 36% rate where at least 10% of a person’s estate is left to charity is not well understood. The Government has recently consulted on the taxation of trusts and feedback is currently being analysed.

The Treasury, which commissioned the report, has commented that it will respond to the recommendations in due course. The full report can be found at https://www.gov.uk/government/publications/ots-inheritance-tax-review-simplifying-the-design-of-the-tax

We will, of course, keep you up to date with any developments. In the meantime, should you have any queries around planning your estate and IHT, please do not hesitate to get in touch.

By Vicky Smallwood

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