The report recommends the Treasury should consider, as a package, to reduce the seven-year rule for lifetime gifts to fall outside the inheritance tax (IHT) calculation on death to five years, abolishing taper relief and the 14 year rule which sometimes bites.
The current rules are unnecessarily complex and the simplification should be welcomed. The proposals would reduce the administrative burden for executors following a person’s death. However, there would be winners and losers under the changes.
Reforming the exemption for gifts made out of surplus income by limiting the exemption to a fixed percentage of income or replacing it with a higher annual gift allowance.
In principle, simplification here would be helpful as the record keeping required for claiming this exemption is very onerous. However, for people with significant surplus income this would restrict what is currently a generous exemption.
Removal of the capital gains tax (CGT) uplift to market value on death, where business property relief (BPR) or agricultural property relief (APR) or the spouse exemption from IHT applies.
I would not welcome this. It would result in increased tax and it is hard to see how it would make things simpler as it would require ongoing retention of historical records. For anyone with assets which they intend to pass down the family on death this could have a significant impact.
Removal of BPR from shares traded on the Alternative Investment Market (AIM).
This is perhaps unsurprising – it’s an easy win for the Treasury, and the AIM market now comprises some significant businesses. The removal of the relief may affect the value of some of the AIM shares and investors’ interest in this market.
BPR is a valuable relief for some businesses which carry out both trading and investment activities, such as property letting. The trading threshold for BPR is lower than that required for CGT reliefs and the report recommends that the Treasury consider whether this is appropriate.
Again, the recommendation is unsurprising. Aligning the threshold with CGT would make things simpler but it could negatively impact the availability of BPR on many businesses. This is a concern and we will be watching it closely. The report also suggests that it should be considered as part of a package alongside the proposed alignment of IHT treatment of furnished holiday lets with that of income tax and CGT. This would be a welcome change.
Leaving the residence nil rate band untouched.
This is a very complex area of law and an area where simplification would have been really welcome – but it seems to have been skirted over!
Proceeds from term life assurance policies should be free from IHT whether or not they are written in trust.
This would make things simpler and I would welcome it. The report recommends a separate review of the tax system as it applies to pensions.
The report acknowledges that simplification is required when it comes to trusts but makes no recommendations as HMRC’s ongoing trust consultation has a wider remit.
It’s fair to say this is not particularly helpful!
We will, of course, continue to watch how the Treasury reacts to the recommendations and report back in future.