OTS recommends reform of IHT aiming to make it simpler but with substantial changes to tax exposure proposed.
The Office of Tax Simplification (OTS) has been asked by the Government to perform a review of and suggest changes to simplify the Inheritance Tax (IHT) rules. Its second report makes some significant proposals. These including changing the ‘Potentially Exempt Transfer’ (PET) regime, the scope of ‘Business Property Relief’ (BPR), the important Capital Gains Tax (CGT) relief known as the ‘uplift on death’, among many other changes. The Government will no doubt consider these proposals, but it is not known at this stage how many of them will be taken up. Many individuals will welcome the proposed moves towards simplicity, especially some changes around record keeping. Regarding changes to tax exposure, some individuals may have their tax exposure on gifts and/or death changed, up or down, if the proposals are implemented. This does create some extra uncertainty pending the Government response. Those affected will no doubt watch the progress of these proposals with interest and may wish to assess the impact on their position.
The second OTS report on its review of IHT, entitled Inheritance Tax Review – second report: simplifying the design of Inheritance Tax, explores the main complexities and technical issues that arise from the way IHT works. The scope of the recommendations does not cover trusts more generally due to other current consultations.
Overall the OTS suggests that the Government makes IHT simpler, easier to understand and more intuitive to operate. It makes recommendations to streamline gift exemptions, change the way the tax works in relation to lifetime gifts, and address distortions in the operation and scope of reliefs for business and agricultural property. The most fundamental suggested change is probably the removal of the CGT base cost uplift for assets where the IHT has been relieved.
What will the impact be?
The OTS notes that many of the problems identified are connected, so solving one in isolation would simply create knock-on issues in other areas. The OTS recommendations are therefore considered in three key areas. Below is a high level summary of the main recommendations the OTS has made for the Government to consider.
1) Lifetime gifts:
This section is about the treatment of gifts made during a person’s life and the interaction of such gifts with those made on death under a will.
2) Interaction with Capital Gains Tax
This section is about the complex interaction of IHT and CGT, specifically looking at what the OTS says is the impact of distortions to decision making.
3) Businesses and Farms
Recognising that the main policy rationale for BPR and Agricultural Property Relief (APR) is to prevent the sale or break up of businesses or farms to finance IHT payments following the death of the owner, this section identifies complexities in the application of these reliefs and proposes:
We now await the Government’s response to the recommendations made by the OTS on both this, the second OTS report on IHT and also the first OTS IHT report, published in November 2018, which dealt with the administration of IHT.
What action should individuals now consider taking?
In practice there will be a range of possible routes that can be followed in managing IHT. It is not only necessary to consider both the objectives and circumstances of the individual and their family, but also to review all the relevant facts (e.g. asset values and income requirements). Whether or not the rules are changed, now is the time to take stock and make positive decisions for your family.
Please call your usual KPMG Private Client contact to discuss how IHT and the recommendations suggested by the OTS might affect you.
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