Recently the Office of Tax Simplification (OTS), an independent advisory body called for an overhaul of the IHT system to allow for simpler administration of estates for grieving families.
There were various recommendations from the OTS report:
- Increase on the annual cap on tax free gifts and a simpler structure. Currently an individual can give away; £3,000 per year which can be carried forward from the year before if it has not been used and an unlimited number of gifts under £250, parents can give away £5,000 towards a child’s wedding and grandparents can give £2,500 tax free. The recommendation is that there should be a simple increased figure allowance for everyone. The OTS pointed out that if the cap had risen with inflation the current cap would stand at £11,900. Some people have criticized the increased cap for abolishing the ‘IHT loophole’ that allows individuals to give away an unlimited number of cash gifts if it can be proven it has been given out of an individual’s extra income that does not impede on their ‘normal’ standard of living.
- Simplify the administration for grieving families is the reduction of the ‘7 year rule’ to 5 years. The current rule is that if a deceased’s estate is subject to IHT and they have made gifts (above the general allowance) within the last 7 years of their life, these gifts will be added towards their taxable estate. The proposal is to reduce this to 5 years, this is beneficial in that there would be a smaller window to take into consideration for IHT. However, they also proposed to abolish the taper relief that is currently applied to lifetime gifts, currently if an individual dies within three to seven years of making a gift, the tax payable tapers on a sliding scale.
- A further reform from the OTS and arguably the most controversial is the proposal for the Capital Gains Tax (CGT) protection on death to be removed. Currently, when a person passes away and passes land to their beneficiaries, the land can be sold without the beneficiary paying capital gains tax. The report proposes that transfers on death would essentially become the same as transfers during lifetime, meaning the beneficiary/seller would have to pay CGT on the change in value between the original cost and sale value. The OTS have stated that this change may incentivise more landowning farm owners to transfer assets ahead of death, helping to accelerate succession planning.
Other proposed changes included;
- clearer guidance from HMRC regarding the valuation of business or agricultural property,
- fairer treatment of individuals with furnished holiday lets,
- a review of business property relief.
We are expected to hear the Governments response to the recommendations in the next Budget (late November).
For more information, please contact Amanda Bailey, head of trusts and estates on 01244 354805