Reform of The Inheritance Tax

How will IHT change?

There have been proposals for many years regarding the updating of IHT. At present, IHT equates to less than 1% of the total taxes collected. In addition, it is difficult for HMRC to account for the amount of lifetime gifts which are not taxable as these gifts do not need to be declared. As such, the government has no idea how much wealth is being passed by lifetime gifts compared to the amount being gifted at death.

Whilst there have been many suggestions for the reform of IHT, the most popular is that of a low flat rate tax of between 10% and 20% (if the estate was over £2 million) on lifetime gifts and gifts on death. Most reliefs would be abolished, including BPR and APR. in addition, the NRB would be replaced with a death allowance which would be of a similar level as the NRB (£325,000) however would not be renewed every 7 years. Everyone would also benefit from a lifetime annual gift exemption of £30,000.

Any tax payable on an estate would be payable from liquid assets, i.e. cash. If the assets were illiquid, i.e. property or business assets, the estate would be eligible to pay the tax by instalments over a period of 10 years and in the case of business or agricultural property, this could be paid by interest free instalments.

The proposals confirm that the spousal/civil partner exemption and charitable exemption should remain available.

In addition, the Capital Gains Tax (CGT) free death uplift would be abolished. Currently, if you inherit property and sell or transfer it at a later date, your Capital Gains Tax liability will be calculated at the sale/transfer value less the acquisition value (the value of the asset when you inherited it) – deducting any allowances available. The proposals mean that the acquisition value would now be that when the property was purchased by the person who has died meaning the gain could be significantly higher.

All gifts over £30,000 per annum would be taxed at 10%. If the gift was cash, 10% would be withheld by the donor (the person giving the gift) however if the gift was an illiquid asset (business or property) the donor would have the option to pay over two years in interest bearing instalments (again, for business and agricultural property this could be interest free instalments).

Whilst the donor would have an annual exemption of £30,000 there would be no other reliefs available such as gifts in consideration of marriage and normal expenditure out of income relief as these would be abolished. The annual allowance could not be carried forward. All lifetime and death gits would be taxed.

Any gifts into trusts would also be taxed in the same way as gifts to individuals. There would be no NRB available on trusts and discretionary trusts would pay an annual charge. Pension funds would also be taxed at death at 10% or 20%.

Advantages?

Those who spread lifetime gifts over a number of years of less than £30,000 would be better off. However those making larger gifts would be worst off, although under the current rules this is subject to them surviving by 7 years. Larger liquid estate would be better off at lower rate of 10% however this doesn’t take in to account the abolition of the CGT uplift on death and taxing on lifetime gifts.

Whilst it would appear the reforms would take some years to be implements, there has been speculation that due to the current economic climate, these proposals could be introduced a lot sooner than anticipated. Anyone considering estate planning should be keeping up to date with any developments in this area.