Carousel_Arrow Chat icon_cookie IHT_trust_wills IR35 Combined Shape 2 Group 10 Login Mobile Menu Share Share Email SubMenuMobile Group 9 VAT View_Gallery View_List capital_allow Triangle 2 Copy Close construction cyberpro employment_tax_shares emplyer_solutions entrepreneurs_corps fee_protect Group 7 grant_fund Group i_Clock i_Consult i_Done i_Eligibility_Tick i_Enter i_Filter i_HMRC i_Negative i_Play i_Plus i_Reset i_Support_Legal i_Support_TaxDesk i_Support_VAT i_Tick noun_marketing_1872083 noun_online_2126759 i_download i_meet Group Copy 24 Group 18 noun_electrical_1240755 copy noun_Technology_2125422 noun_Science_2031115 i_tick_bullet_block international_tax patent_box private_client property_sdlt r_and_d reliefs_incentives Search specialist_tax status tax_indemnity valuation YouTube
Markel Tax

06 Feb 2020

Simplifying Inheritance Tax – The Reform of IHT

The Reform of IHT

On 27 January 2020, the All Party Parliamentary Group (APPG) published a report on the ‘Reform of inheritance tax’. The report makes two major recommendations for the government to reform the current IHT regime.

Recommendation 1

The APPG recommends that policymakers replace the current IHT regime with a tax on lifetime and death transfers of wealth, with very few reliefs and a low flat rate, likely between 10% and 20%. The CGT tax-free death uplift would be abolished.

  1. The Nil Rate Band (NRB) remains, but only applies on death. The taper relief provisions will be abolished together with re-freshing the NRB every seven years.  There will still be a transferrable between spouses on the first death, as at present.
The spouse exemption will also remain but the amount exempt may be restricted.
 
Tax will be levied on the estate in excess over the NRB at 10% up to £2 million and 20% thereafter.
 
The residence nil rate band will be abolished.
  1. The lifetime gift reliefs (annual exemptions and small gift, gifts in consideration of marriage, gift out of normal income allowances) will all be abolished. 
Potentially exempt transfers will be abolished, so there will be certainty on lifetime gifts. Instead, an annual allowance of £30,000 will apply to any gifts made by an individual, whether to another individual or a trust.Tax on gifts in excess of this will be levied at 10%.Tax will always be due from the donor.
Because of the above, the rules regarding gifts with reservation of benefit (GROB) and pre-owned assets tax (POAT) will be abolished. If an individual continues to live in property given away, the donee will not be able to claim Principal Private Residence (PPR) relief on the period of occupation subsequent to the gift.
  1. Agricultural and Business Property Reliefs will be abolished. Instead there will be an option to pay the tax in 10 interest free instalments (or until date of sale if earlier).
  2. Trusts will also be receiving an overhaul.  As noted above, the £30,000 gift allowance will apply to gifts to trusts as well as individuals.  Tax will be levied at 10% on gifts into trusts in excess of the allowance, payable by the donor.  No grossing up will be required. 
The cumulation principle which aggregates certain lifetime gifts going back 14 years to the death estate will also be abolished.  In addition, the rules grossing up of chargeable gifts in the Will when the remaining estate is exempt will also be abolished. 
 
Finally, there will be an annual fixed rate of tax on relevant property trusts and taxes when assets leave the trust.
  1. The CGT position on lifetime gifts and on death will also be reviewed. When an asset is transferred, the gain will be held over until the sale of the asset. There will be no tax free uplift on death. 
  2. Domicile is to be abolished as the connecting factor for IHT. Instead the IHT position will depend on the number of years an individual has been resident in the UK and the situs of the assets.  The recommendation is that if individuals are UK resident for 10 out the previous 15 years, they will be subject to UK IHT on the same basis as a UK domicile individual.

Trusts will not be protected where there is a UK resident beneficiary or a settlor who has been resident for 10 out of the 15 previous tax years

Recommendation 2

The APPG recommends that HMRC and HMT are given greater powers to collect more meaningful data through compulsory electronic reporting of lifetime gifts over the current annual exemption of £3,000, even if they are not immediately taxed.
For example, at present, when an individual passes away, the personal representatives have the onerous task of having to work out what gifts the deceased made in the previous 7 years, sometimes being extended to 14 years in order to calculate how much NRB is available. If this reported at the time the gift is made, then it would make the job of the personal representative much easier.
Under the new regime, a higher annual allowance would mean the majority of smaller gifts would not need to be reported and gifts in excess of £30,000 are immediately reportable and taxable which would remove the need to keep records for previous years.

Conclusion

The above proposals aim to simplify the IHT regime by abolishing many of the exemptions and reliefs we use today and replacing them with more simplistic reliefs.  Making the rules easier to understand and abolishing PETs will give certainty and is likely to assist people in their estate planning.
The reduction of the IHT rate from 40% to potentially 10% will be welcome news for many taxpayers, and the disconnect from domicile, a common-law concept that has been ‘borrowed’ by the IHT regime will also please many people.  The situs connection is similar to the position now, so that does not reflect any significant change.  Residence is already a connection with the deemed domicile rules applying when an individual has been UK resident for 15 out of the last 20 years becoming the new connection.  However, the reduction to 10 out of the last 15 years may give some non-domiciliary pause for thought about spending time in the UK.  In addition, reducing the time before worldwide assets become taxable may make some change their mind about longer-term investment projects in the UK that they would have considered had they been able to spend longer here without being exposed to IHT on their worldwide assets.

Finally, applying the no gain no loss principle for CGT on death would require historic records to be kept and transferred to the new owners of the property, and such information may not be easily obtainable.

If you have any IHT queries, please contact Reena Bhudia at Markel Tax on 020 3815 8999

Tagged IHT trust & estate planning IHT trust & estate planning
Next article in series

03 Feb 2020

Brexit and VAT?