The Office of Tax Simplification (OTS) has made some recommendations and proposals to make changes to Inheritance Tax. Whilst these proposals may look good on the surface, do they actually lead to the elimination of some useful tax breaks such as taper relief?
A welcome proposal made by the OTS is the reduction of the seven-year gifting rule to five years. This would see individuals being able to make gifts to their children and only have to survive five years for it to fall outwith their estate for Inheritance Tax purposes. Perhaps the suggested change to five years is because most banking institutions only hold statements and financial information for the preceding five years before a person’s death.
Whilst this new five year rule has its advantages, it does come with the removal of taper relief meaning that substantial gifts will see no tax deduction after three years and will need to have a survival rate of the full five years to have any benefit for Inheritance Tax purposes.
Another of the proposals is to amend the general exemptions around gifting and bring these in to one pot. These have not been changed for several decades and cover small capital gifts, the annual exemption and gifts for weddings, etc. Instead of various types of exemption, this would see one large annual exemption of capital gifting which would, on the face of it, appear to be a sensible move.
However, it seems that what is given with one hand is taken away with the other as there is also the proposal to remove the currently under-utilised gifting exemption of normal expenditure out of excess income over expenditure. Although not widely used, for high earners this can be a way to pass substantial sums down without any time limit.
The Residene Nil Rate Band
Of disappointment to many practitioners will be that the residence nil rate band will not be reviewed. The OTS is of the view that, as this is a fairly new exemption, they require time to consider its effectiveness. It is the view of many practitioners that this is an overly complicated exemption. Many would rather see an increase in the Nil Rate Band (currently at £325,000) rather than an additional allowance for the main residence.
Life Policies etc.
Another welcome suggestion is that life insurance and other death benefit payments should be free from Inheritance Tax on death whether they are written into a trust or not. This would make it simpler for people taking out these policies in order to mitigate Inheritance Tax.
Whilst some of the changes to Inheritance Tax proposed by the OTS are welcome, some others, such as the proposal to remove the excess income exemption would see tax mitigating tools removed for some individuals.
Should you wish to discuss your own Inheritance Tax planning, please do not hesitate to contact a member of our Private Client team who would be delighted to assist you.