Inheritance Tax Planning: Should we be planning now?
When eventually we come out of lockdown and the after-effects of COVID19 on our economy, and in particular on public finances, start to be fully addressed there seems little doubt that the government is going to have to find ways to collect more tax. The most obvious routes to this are through small increases in the Basic rate of income tax and increases in the rate of VAT, both of which the government has previously pledged not to increase. With this in mind one suspects that the government will look for other sources of additional income. Inheritance tax yields a relatively small sum but it could probably be increased and many who work with the tax suspect that it could be a target.
In 2019 the Office of Tax Simplification issued a report on inheritance tax highlighting a number of what it perceived to be unfair aspects of the tax, and some possible routes for simplifying it. In January of this year an All-party Parliamentary group issued a further report, which many of us thought had more chance of implementation than the earlier suggestions of the Office of Tax Simplification. In both cases the principal aim of the recommendations was to try and reduce complexity, to remove some of the perceived unfairness, whilst remaining neutral in relation to the amount of tax raised. However past history of tax simplification, particularly in the area of inheritance tax, has been that it is often a convenient way to increase the tax take. Many of the suggestions contained in both papers could easily be implemented in a way which increased tax.
Below are some suggestions:
- Substantially increase the annual tax-free gift allowance, suggestions range up to £30,000 per annum. This sounds very generous but it needs to be married with the second suggestion listed below.
- Remove the ability to make potentially exempt transfers. In other words end the rule that a gift made more than 7 years ago escapes tax. Instead any lifetime gift which exceeds the annual allowance is subject to a flat rate of tax.
- Abolish or tighten the rules relating to the normal expenditure out of income exemption.
- Abolish the residence nil rate band. This is widely perceived as a complicated penny-pinching exemption which is also grossly unfair, but the abolition would affect many families.
- Raise the nil rate band quite substantially, perhaps to £1,000,000 or even to £2,000,000.
- Abolish or substantially modify Agricultural Property Relief and Business Property Relief. These two reliefs were intended to ensure that farms and businesses could be carried on by your family without leaving them a substantial tax burden. In practice this rarely happens and the inheritors of farms and businesses tend to simply take advantage of the inheritance tax relief and then sell the farm or business. This is widely perceived as both unfair and a policy failure.
- Abolish or modify the Capital Gains Tax free uplift on death. The idea behind this exemption is that you shouldn’t have to pay both Capital Gains Tax and Inheritance Tax at once, but it is also widely perceived as a giveaway, particularly in the case of people who benefit from Agricultural or Business Property Relief where they inherit the property free of Inheritance Tax and then see a large Capital Gain wiped out.
- Consider modification to the rules relating to the tax-free status of pension funds.
The above is not an exclusive list but it covers the main suggestions that have been seen. Whilst these could very easily be arranged in such a way as to ensure tax neutrality, it takes very little to see how picking and choosing which of these suggestions to adopt a government could substantially increase the inheritance tax take.
At Herrington Carmichael we advise extensively on the use of the current exemptions and are carefully watching for any changes and beginning to develop ideas for tax planning in the event that some of the above ideas are implemented.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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We are solicitors in Camberley, Wokingham and London. In 2019, Herrington Carmichael won ‘Property Law Firm of the Year’ at the Thames Valley Business Magazines Property Awards, ‘Best Medium Sized Business’ at the Surrey Heath Business Awards and we were named IR Global’s ‘Member of the Year’. We are ranked as a Leading Firm 2020 by Legal 500 and Alistair McArthur is ranked in Chambers 2020.