insideKENT Magazine Issue 90 - September 2019 | страница 159

FINANCE
Update on
Inheritance Tax (IHT)
by Rick Schofield, Partner at Wilkins Kennedy Ashford
THE OFFICE OF TAX SIMPLIFICATION (“OTS”) HAS
RECENTLY PUBLISHED THEIR SECOND REPORT FOLLOWING
THE REVIEW OF INHERITANCE TAX (“IHT”) WHICH INCLUDED
11 RECOMMENDATIONS. THESE RECOMMENDATIONS CAN
BROADLY BE CATEGORISED INTO THREE AREAS, NAMELY,
LIFETIME GIFTS; INTERACTION WITH CAPITAL GAINS TAX
(“CGT”); AND IHT RELIEFS ASSOCIATED WITH BUSINESSES
AND FARMS. SOME OF THE KEY RECOMMENDATIONS HAVE
BEEN SUMMARISED BELOW.
Lifetime Gifts – time limits and taper Interaction with CGT
When an individual makes a gift to another
individual for IHT purposes this gift is only
a Potentially Exempt Transfer (“PET”) because
it is necessary for the donor to survive seven
years from the date of the gift to be completely
free of IHT. If the donor does not survive
the gift by seven years the IHT that may
be chargeable is reduced on a sliding scale
(known as taper relief) depending on how long
they survived. Currently, when an individual inherits assets on
death, these assets benefit from a market value
uplift for CGT purposes so that the inherent
gain is wiped out. The reason for this uplift is
to mitigate double taxation on the basis that the
asset would be subject to IHT on death.
Therefore, the individual inheriting the asset
does not pay CGT in relation to the growth in
value associated with the asset whilst it was
previously owned by the deceased.
At the time of death, obtaining information
relating to gifts made seven years ago can be
difficult as it is difficult for executors to obtain
bank statements and other financial records
more than six years old. The capital gains uplift applies to all assets
and therefore it also applies to assets that
would otherwise be subject to IHT by virtue of
certain exemptions. These exemptions could
include spouse exemption, or other IHT reliefs
such as Business Property Relief (“BPR”)
and Agricultural Property Relief (“APR”).
Where assets qualify for IHT reliefs, the recipient
of the inheritance would inherit the asset free
of IHT and is potentially able to sell the asset
with no CGT. This circumstance gives rise to
zero taxation.
Furthermore, the application of taper relief is
complicated and not understood properly – it
is a reduction in the tax payable not a reduction
in the value of the PET.
OTS therefore recommends that taper relief
should be abolished and shorten the survivorship
period from seven to five years.
Lifetime Gifts – normal gifts
out of income
Another significant reform that was included
in the report relates to exemption for
normal expenditure out of income. Where an
individual has excess income, they can gift
that excess income free of IHT if a pattern can
be established.
OTS recommends either this relief is reformed
to reduce the administrative burden in calculating
the excess income. One of their suggestion is
to limit the amount of income to a fixed
percentage based on the most recent tax return.
The alternative recommendation is that the
relief is abolished altogether and replaced with
a higher personal gift allowance. OTS has not
suggested a limit but a £25,000 personal gift
allowance apparently covers the value of 55%
of all normal expenditure out of income claims.
The OTS mentions in their report that the CGT
uplift on death distorts decision making when it
comes to giving assets away. This is because, if
an asset qualifies for IHT relief, it is usually
more beneficial for the individual to pass these
assets on death to benefit from both the IHT
exemption and the CGT uplift.
The OTS therefore recommends removing
the CGT uplift for assets that benefit from
IHT exemption so that the recipient acquires
the asset with the original acquisition cost of
the deceased.
For CGT purposes, when an individual gives away or sells
their business to a third party, they may qualify for CGT
reliefs such as gift relief or Entrepreneurs’ Relief. To qualify
for such reliefs, the business must also qualify as a trading
business. However, unlike BPR, to qualify for CGT reliefs
the bar for assessing the trading activities is higher as it is
necessary for the business to be substantially trading which
HMRC suggests is greater than 80%.
OTS recommends that the Government should consider
whether it is appropriate for the business test to be different
for IHT and CGT.
Summary
It is still early days whether these recommendations may be
introduced as law but they are certainly suggestions the
Government will consider in an attempt to simplify the IHT
regime. This can only mean that changes are afoot and it
will be necessary to consider the impact on an individual’s
estate and review one’s Will. Please get in touch with your
usual contact for further details regarding the above or
information relating to the other recommendations contained
in the report.
Should you wish to enquire further into these areas, please
contact us.
Local offices:
Ashford: 01233 629 255 / Canterbury: 01227 454 861
Maidstone: 01622 690 666 / Orpington: 01689 827 505
Sandwich: 01304 249 997
IHT reliefs
Many business owners and farmers have relied
on a form of IHT relief called Business Property
Relief (BPR) and Agricultural Property Relief
(APR) when planning to pass their business to
the next generation. One of the main conditions
for BPR to apply is that the business must be
wholly or mainly trading. This test considers a
trading business to be one where its trading
activities is greater than 50%.
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