Where next for Inheritance Tax?

The Office of Tax Simplification (OTS) is an independent body tasked with making recommendations to government as to how tax legislation can be simplified. Not an easy task given our hideously complicated system!

In January 2018 The Chancellor of the Exchequer asked them to look at “administrative and technical aspects of Inheritance Tax”. They issued a report into administration aspects in November 2018 and have now published a 107 page report into technical aspects of the tax.

OTS key recommendations

  • Reduce the seven year “clock” to five years. This would mean only gifts made in the five years before death would be taken into account for IHT.
  • Simplify the system relating to small gifts.
  • To extend Business Property Relief (BPR) to furnished holiday letting properties. As David Threlkeld reported last month, HMRC currently treat these as investment assets.
  • Recommend that HMRC take a more sympathetic approach when a farmer is forced to leave his farmhouse due to ill health. At present HMRC often denies Agricultural Property Relief (APR) where a property is unoccupied.
  • For diversified businesses to qualify for BPR they will need to show a minimum of 80% trading activities rather than the current 51%.
  • When a person inherits assets qualifying for APR and BPR, they should take over the original cost for Capital Gains Tax rather than getting a “tax-free uplift”.

What happens next?

By the time you read this article we should have a new Prime Minister, and possibly a new Chancellor as well. However, it is fair to say that IHT reforms will not be near the top of their list of priorities.

It is possible that some of the less controversial measures could be introduced fairly quickly, but my guess is that most of these changes will be deferred until after the next General Election in 2022.

Labour Party Policy?

Recent reports suggest Labour are considering more radical policy changes by replacing IHT with a Lifetime Gift Tax (LGT):

  • LGT would be payable by the person receiving the asset, during lifetime or on death, rather than by the person making the gift.
  • Tax would be payable if a person receives more than £125,000 over a lifetime, and would be calculated at a person’s marginal rate of Income Tax.
  • There would be “conditional exemption” for agricultural and business assets, but this relief would be clawed back on a subsequent sale of the asset.
  • A separate report suggested that APR be restricted to either 100 hectares of land or to a monetary amount. This sounds very much like a return of the old Working Farmer relief, last seen in 1981.

It is not too dramatic to say that the IHT system is likely to be radically different in a few years’ time, regardless of which political party is in power. This gives farmers the chance to take action now to protect their businesses.

For more information or advice on how you can protect your farming business, call 01228 690200 or email jonathan.york@armstrongwatson.co.uk

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