Reform set to cut complexity of inheritance tax

(August 2019) Proposed changes could have far-reaching implications for future estate tax planning

Sweeping reform of inheritance tax has been recommended to cut complexity of the so-called ‘death tax’, but experts are warning that individuals will need to review existing planning if the changes go ahead.

Headline recommendations to government from the Office of Tax Simplification (OTS) include changing the rules surrounding gifts of cash, property and other assets made while someone is still alive, and an overhaul of the relationship between IHT and capital gains tax for farm and business assets. 

Proposals include a simplification of the lifetime gift exemptions to a single personal gift allowance, with a revised threshold for small gifts and reform of the regular gift out of income exemption.   The OTS also recommends that the current seven-year gifting rule for potentially exempt transfers be cut to five years.  This is the period which must elapse from the date a lifetime gift is made until the date of death for the gift to be exempt from inheritance tax.  This would also see an end to the complicated taper relief by which the tax charged on gifts may be gradually reduced from year three of the current seven-year period.  

The OTS also proposes that where IHT is due on lifetime gifts, the rules on who is liable to pay the tax should be simplified, and how the £325,000 threshold is allocated between different recipients.   

Wills may need to be re-written to benefit from any tax reform that takes place, as someone who has drawn up their will to reflect the current regime may risk a very different outcome to what was intended if their estate is taxed under the new regime.

This will certainly be the case if the rules change on where liability for tax falls between those receiving lifetime gifts and those who inherit on death, with some of the proposals on allocation of liability having wider implications that will need to be considered.

Also, in the spotlight for reform is the relationship between inheritance tax and capital gains tax in the reliefs available for businesses and farms. 

Another factor to consider in any future inheritance planning is the government’s pledge to extend civil partnerships to opposite-sex couples, following the Supreme Court ruling that restricting them to same-sex couples was discriminatory.  Proposals are currently out for consultation, but the Government Equalities Office has said they hope that the option will be available by the end of 2019.    The right to enter into a civil partnership would give opposite-sex couples the same inheritance tax exemptions as those enjoyed by married couples and same-sex civil partners.   This is not legal advice; it is intended to provide information of general interest about current legal issues.  

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