July 2019 – Death tax – making it “simples”?

Author: Mitchells Roberton
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The Office of Tax Simplification

  • There is (believe it or not) something called the Office of Tax Simplification (“the OTS”). It was set up as a temporary body in July 2010 and it was put it on a permanent, statutory footing by the Finance Act 2016. As its name suggests, its purpose is to provide independent advice to the government on simplifying the UK tax system.

The OTS review of Inheritance Tax

  • In January 2018 the Chancellor asked the OTS to review Inheritance Tax (“IHT”) and, this month, the OTS has published a report entitled “Simplifying the design of Inheritance Tax”.
  • IHT is a notoriously technical tax. One small illustration of this concerns the new(ish) “residence nil rate band”. This was introduced by George Osborne in 2015 with a flourish:

“Inheritance tax was designed to be paid by the very rich. Yet today there are more families pulled into the inheritance tax net than ever before … It’s not fair and we will act. The result for families is this. You can pass up to £1 million on to your children free of inheritance tax. No more inheritance tax on family homes.”

  • That may have been a politically attractive sound-bite and one which made the new relief sound perfectly straightforward but when it came to putting the sound-bite into legislation it grew an embarrassment of arms and legs. The rules about  the “residence nil rate band” run to over 13 dense pages of the Inheritance Tax Act 1984 generously sprinkled with various formulae using acronyms such as “E”, “TT”, “NV/100” and “VT”.
  • Other parts of the Inheritance Tax Act are not much easier to follow. One does not know but it could be that this further layer of complexity introduced by the Chancellor’s “residence nil rate band”  in 2015 was the final straw prompting his successor in 2018 to ask the OTS to have a look at IHT generally with a view to coming up with recommendations for simplifying it.
  • The OTS Report, published this month, runs to some 106 pages. Its recommendations are only that. It is of course for the government to implement any actual reforms. So, who knows, perhaps few (if any) of the recommendations will actually be implemented. Nevertheless, the Report is useful in that it provides a summary of what the current rules are – and the scope for IHT planning under the current rules – even if it turns out that the OTS recommendations don’t materialise.
  • Given that the Report runs to 106 pages this note doesn’t attempt an overall summary but simply picks out a few points. 

The scope of IHT 

  • IHT is primarily a tax levied on the value of the assets of someone who has died after deducting their liabilities – such as any money owing on a mortgage.
  • As well as being charged on the net value of assets transferred on death, IHT is also charged on some lifetime gifts and in relation to trusts.

The main exemptions, reliefs and thresholds for IHT 

The OTS report lists these as follows:

  • Gifts to a spouse or civil partner;
  • No IHT is payable on “chargeable transfers” not exceeding £325,000 (the “nil rate band”) and the “nil rate band” (if unused) is transferable to a spouse or civil partner;
  • The £3,000 annual gift exemption and the £250 small gift exemption;
  • Regular gifts of disposable income;
  • The “residence nil rate band” (mentioned above) for homes left to direct descendants (which, like the nil rate band, is transferable to a spouse or civil partner);
  • Reliefs for a qualifying business or farm;
  • Gifts to qualifying charities and political parties; and
  • “National heritage” assets.

The OTS recommendations generally 

  • The OTS report makes 11 main recommendations in relation to: lifetime gifts; the interaction of IHT with capital gains tax; and reliefs for businesses and farms.
  • But, for now, only one particular recommendation is outlined simply as an example of the sort of things the report contains.

One recommendation in particular

  • The OTS comments that In the relatively unusual situation where the value of gifts made before death is large enough to use all the available “nil rate band”, the calculation of the IHT can be complex, and it may be difficult to understand who ultimately bears the tax.
  • They go on to give an illustrative example: suppose Sarah gives £325,000 to her son James in 2015; suppose in 2016 Sarah gives the same amount to her daughter Claire; suppose Sarah dies in 2018 having made no other gifts.
  • In that situation Sarah’s “nil rate band” of £325,000 is offset against the gift to James as this is the first gift Sarah made. There is no IHT for James to pay on the gift he received. But Claire must pay Inheritance Tax of £130,000 on her gift.
  • The OTS comments that this may well not be the result that Sarah intended or Claire understood.
  • One of the possible solutions the OTS proposes is that (a) any IHT due should be payable by Sarah’s estate – not, as in the above illustration, by Claire, and (b) the “nil rate band” should no longer be allocated to lifetime gifts in chronological order but, rather, first be allocated proportionately across the total of all the lifetime gifts.
  • The OTS illustration makes a striking point but, in general, would one not expect those who are in the happy position of being able to make a gift of £325,000 one year and another of £325,000 the following year to take advice in advance on what the IHT (and other) implications were?

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Allyson Gilchrist: email ag@mitchells-roberton.co.uk

 

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