Earlier this month the Office of Tax Simplification (OTS) published its second and final report in relation to its review into inheritance tax (IHT). As a brief reminder, the first report, as published back in November 2018, looked at the administration side of IHT. This second report focuses on the design and calculation of IHT, and is arguably therefore of greater interest.
The OTS makes a number of recommendations in this second report, including:
- Consider replacing two lifetime gift exemptions – namely the general annual exemption and the specific marriage exemption – with a general personal exemption. Moreover, two further lifetime gift exemptions – namely the small gifts exemption and the normal expenditure out of income exemption – should either be reformed or also replaced by the general personal exemption.
- Consider abolishing taper relief, due to the fact that it is so widely misunderstood by the public. But on the flip side, the period of time that an individual must live for after making a lifetime gift, in order for that gift to not be charged to IHT on their death, should be reduced from seven years to five years.
- Consider reforming the allocation of the nil-rate band (NRB) – possibly to include it being used proportionately across lifetime gifts and the death estate (it is currently used in chronological order).
- Where no IHT is payable on an asset on death, due to a relief or exemption being available, consider no capital gains tax (CGT) uplift being available on that asset.
- Consider whether the ‘trading’ rule for business property relief (an IHT relief) should be aligned with the ‘trading’ rule for holdover relief and entrepreneurs’ relief (CGT reliefs). Likewise consider aligning the trading position for furnished holiday lets, given that the income tax and CGT position currently differs from the IHT position.
- Consider the eligibility to agricultural property relief on farmhouses, where the farmer has had to leave the house for health reasons (eg to go into care).
- Consider aligning the IHT treatment of life insurance policies held inside and outside of trust.
It is important to remember that the recommendations made by the OTS (in both of the reports) are merely just that. There is no obligation on the government to act upon such recommendations, and only time will tell whether any are ultimately implemented (and in what form).