Is the abolition of inheritance tax on its way?
When the Chancellor wrote to the Office of Tax Simplification (OTS) in January asking them to review inheritance tax (IHT), one had to wonder what the outcome would be.
On 27 April the OTS published a call for evidence. On examination of the questions it asked, it is clear that nothing appears to be safe from change. Responses had to be with the OTS by 8 June, with the aim of publishing a report in the autumn before the 2018 Budget, so we may not have that long to wait.
Now, my track record on predictions of possible changes to tax legislation is pitiable so I tend to try and avoid doing so. However, tucked away in the economic think tank Resolution Foundation’s Intergenerational Commission Report published in May were recommendations for radical reform of our IHT system.
Part of their basis for change was that inheritances and other gifts totalled £127bn in 2015/16 but only raised tax of £5bn, equating to an effective rate of just 4%. Between 2006/7 and 2022/23 IHT receipts are forecast to grow at less than a quarter as fast as inheritances.
So the think tank has recommended that the current IHT regime is scrapped and there is a move to a lifetime receipts-based tax assessed on the recipient. Similar receipt-based schemes are in operation in France and Ireland so it is not a new concept. The view being that such a change would deliver both practical and perceptual benefits and not surprisingly also increase tax receipts.
How would it work?
Individuals would have to keep track of cumulative receipts however gifts of £3,000 or less per donor per year, gifts between spouses/civil partners and gifts to charities are excluded . The cumulative gift allowance would initially be £125,000 received tax-free, with the allowance being indexed in line with inflation.
A basic rate of 20% would apply on gifts received between £125,000 and £500,000 with a top rate of 30% applying thereafter. The estimate is that such a change would generate £11bn annually compared to the forecast of £6bn under the current system.
So it would be farewell to both the seven year cumulative gifting rule and the normal expenditure out of income exemption thus removing many of the tax planning opportunities currently available.
Business relief and agricultural relief which currently cost the Treasury £1.22bn would also come under the cosh and better targeted to remove any predominantly tax driven motivation for owning the assets. The suggestions here are to cap the relief, increasing the minimum ownership period and limiting the relief to “real” farmers and business owners
The trust tax regime, which is perhaps the most complex, would be redesigned to reflect the lifetime receipts rules.
If none of that appears to be enough it also recommends that the tax-free treatment of pension funds inherited on death of the member before 75 is removed and subject not only to the new regime but also make it liable to income tax.
Finally it suggests also applying CGT on death, though it may be restricted to additional residential properties and assets qualifying for Business Property Relief and Agricultural Relief.
It may be that only some or even none of these recommendations are taken up. It does however give us an indication that the days of referring to IHT as a ‘voluntary tax’, on the basis that with careful planning an individual’s liability may be reduced or even wiped out, may soon no longer be the case.
One thing that can be said for individuals’ who have held off making gifts for IHT planning purposes, now may be the time to act. Definitely a case of better the devil you know.
This blog first appeared in Professional Adviser