The Office of Tax Simplification (OTS) recently published its second report on making Inheritance Tax (IHT) simpler to understand and have proposed a range of recommendations.
These include making changes to lifetime gift rules and the length of time that a gift can be counted in someone’s estate on death. At present, gifts generally remain in your estate for 7 years. The report suggests reducing this to 5 years at the same time as scrapping the taper relief rules which can currently apply after 3 years. That sounds like a sensible simplification. A reform of the lifetime gift exemptions which is long overdue is also proposed.
Other welcome recommendations are a review of how Agricultural Property Relief (APR) applies to farmhouses when a farmer goes into care, which can be particularly difficult for farming families, and removing the need for life assurance policies to be written in trust to remain IHT free.
However there are also recommendations that could potentially make the tests for Business Property Relief (BPR) tougher which would be bad news for businesses that currently sit just on the right side of the line to qualify for the IHT relief.
One of the most significant recommendations is actually about Capital Gains Tax (CGT) rather than IHT. Currently assets are rebased for CGT purposes on death which can be particularly valuable where they are also IHT free because they qualify for APR or BPR or are exempt because they are inherited by a surviving spouse. The report proposes that in these circumstances the government considers removing the CGT uplift so that the recipient inherits the asset at its historic base cost for CGT. That could result in significant CGT liabilities when inherited assets are sold.
It is important to remember that these are only recommendations at this stage and to be implemented would need to be changed in law. It will be interesting to see whether the political will exists at this time to implement these recommendations.
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