A chance to simplify inheritance tax?

Inheritance tax (IHT) has remained largely unchanged for the past decade, apart from the introduction of the residence nil rate band in 2017. However, proposals from both sides of the political spectrum mean any current estate planning may soon require revision.

The latest report on simplifying IHT, produced by the Office of Tax Simplification (OTS), concentrates on three key areas.

Lifetime gifts The report recommends that the seven-year survival period is reduced to five years, but with taper relief abolished. However, such a change would create a five-year cliff edge for IHT chargeability. The OTS also suggests that the various lifetime exemptions should be replaced with a personal gifts allowance. This might also be used to replace the exemption for normal expenditure out of income.

Businesses The threshold for trading activity for business property relief should be aligned with that for capital gains tax (CGT) reliefs. So the present test of ‘wholly or mainly’ (generally meaning above 50% of trading activity) would be replaced with an 80% test.

Interaction with CGT Currently, there is a CGT tax-free uplift on death, with a person inheriting assets at their market value at the date of death. The OTS recommends that the uplift be removed where an asset also qualifies for an IHT exemption, and the recipient of the asset should inherit at the historical base cost of the person who has died.

Given the current political turmoil, there could soon be a change of government and the Labour party has its own IHT plans. So you may wish to take some simple planning measures. If you are in a position to make large tax-free gifts out of income, do so now in case the exemption is curtailed. Look at restructuring a business that falls between the 50% and 80% trading activity tests. And if there is no CGT advantage to retaining assets until death, consider making lifetime gifts instead.