How might proposed changes to inheritance tax affect you and your loved ones?
Inheritance tax (IHT) can cost your loved ones dearly when you die, leaving them with far less wealth than you intended. Without proper planning and advice, the Office of Tax Simplification’s (OTS) proposed changes to IHT – if brought into effect – could further impact their tax bill.
Why might IHT rules be changing?
IHT has long been referred to by many as confusing and complex. In November 2018, the now ex-Chancellor Philip Hammond decided that it was time to try to simplify the rules. He asked the OTS to investigate and make recommendations for change.
The OTS’ most recent findings were published in its second and final report, which was released in July. In it, it highlighted a number of areas that were in desperate need of reform. The government has yet to respond officially, but it is hoped that any changes to IHT will be announced within the next few months.
In the meantime, it is important to understand what might be changing and how this might impact your legacy plans. Being prepared now will help you act appropriately when the government responds, protecting your loved ones from any amendments which might dramatically impact the IHT chargeable.
Proposed changes to IHT rules
The recommendations made by the OTS cover a number of IHT rules, from IHT-exempt gifts and gift allowances to life insurance policies and capital gains uplifts. Some of the most talked about proposals are those that focus on lifetime gifts and the confusion surrounding gift allowances.
Time limits for gifts and IHT
If you make a gift, but die within seven years, the beneficiary of the gift may have to pay IHT. The amount payable can, in some cases, be reduced by the taper relief. This decreases the tax chargeable on a sliding scale, from 40% if you die within three years to 0% if you are still alive after seven years.
A common criticism of this ‘seven-year rule’ is that it is difficult for Executors to administer. They rely on bank statements to help them prove whether or not IHT is chargeable on gifts. However, accessing seven years’ worth of statements can be difficult and time consuming. To remedy this, the OTS has suggested reducing the time limit from seven to five years.
The OTS also advocates the removal of the taper relief. If this occurs, it means that your loved ones may be charged the full 40% rate on gifts, regardless of whether you pass away two days after making the gift or two days before the five-year time limit has been reached.
Replacing gift allowances
Under current rules, there are a number of different gift allowances available. For example, you can give away £3,000 per year and you can also give your child £5,000 towards his or her wedding – all without having to worry about IHT.
To simplify gift allowance rules – and to reduce the confusion surrounding allowance levels and requirements – the OTS has proposed introducing a single gift allowance. A suitable allowance level wasn’t proposed, but it is worth noting that the current gift allowance levels have not been reviewed since the 1980s.
Capital gains tax, life insurance, business property and agricultural relief and more
The eleven recommendations made by the OTS also cover a number of other areas of IHT legislation. Some of these include: making all life insurance policies IHT exempt (thereby removing the need for these to be held in trust), reconsidering qualification requirements for business and agricultural property reliefs, removing the capital gains uplift for those who can also apply IHT relief, and reassessing how the nil-rate band is applied to gifts and the estate.
To find out more about potential changes to IHT rules and how they may affect you and your loved ones, contact your financial advisor or call our office to book an appointment.