Inheritance Tax in the Spotlight

07 January 2020 - Elizabeth Nichols

When the Office for Tax Simplification (OTS) published its review of Inheritance Tax (IHT) back in July, the proposal to shorten the time that lifetime gifts could remain in your Estate attracted the majority of the headlines.  However, in the subsequent months it has become apparent that there are several big changes which have almost gone under the radar.

The OTS review was ordered by Philip Hammond, the previous Chancellor, and although he no longer occupies No 11, the current incumbent, Sajid Javid, made headlines when he told the Conservative party conference that he would like to scrap IHT altogether.  Although this seems unlikely (the tax is forecast to generate receipts of £5.3billion this year) what does seem certain is that there will be some changes or ‘simplifications’ to IHT in the near future.  And when taxes are simplified, it usually leads to a higher tax bill for the person concerned.

The changes suggested in the report that appear to have been largely brushed over relate to  assets which qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR).

Currently, when an individual dies, their beneficiaries inherit their assets at their current value for Capital Gains Tax (CGT) purposes.  This uplift in value can prove very valuable because it enables the beneficiary to sell the asset with little or no CGT payable.  However, the OTS review has suggested that for assets which qualify for BPR or APR, such as shares in a family company and farmland, this CGT uplift should be scrapped.  Instead, the beneficiary of such assets will inherit the CGT base cost of the deceased, which in some cases can be the value of the asset in March 1982.  The rationale behind this is that because IHT is not due on assets which qualify for BPR or APR, they should not enjoy the benefit of reduced CGT in the hands of the beneficiaries.  Some would argue that this is only right, but in practice it can have a drastic affect.  This is especially the case when assets are left to two or more beneficiaries who want to simplify the ownership into sole names.  It could lead to a significant tax charge arising.

Another change suggested relates to the availability of BPR.  As it stands, in order to qualify for 100% relief from IHT, a business needs to be wholly or mainly trading.  For IHT purposes, ‘mainly trading’ means more than 50%.  This means that businesses which have a reasonable proportion of non-trading assets or income (such as let properties) can still qualify for IHT relief.  There is a similar trading requirement in CGT for Entrepreneurs’ Relief, however in order to qualify as trading for CGT, the business needs to be at least 80% trading.  The OTS has said that having two definitions for ‘trading’ within tax legislation needs to be simplified, and have suggested the trading test for BPR purposes is altered from 50% to 80% in line with the CGT rules.  This is going to mean that a large number of trading businesses, including many farms and other family owned businesses, which have diversified their activities, may find it much harder to obtain IHT relief.  The loss of a relief which saves 40% tax could mean that some of these family owned businesses have to be sold or broken up in order to pay the IHT, which ironically is exactly what BPR was designed to help prevent.

So IHT is likely to change and no doubt the changes will be announced as part of a great simplification of the overcomplicated and burdensome tax of the past.  There will inevitably be a number of people who are better off as a result of the changes and these are likely to grab the headlines.  But if previous ‘simplifications’ can teach us anything, it is that with all of the giveaways, there will be some hidden catches buried in the small print.

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