The Office of Tax Simplification (OTS) has recently issued its second report on Inheritance Tax (IHT). Here are the bullet points:-
- Business Property Relief (BPR)
BPR effectively exempts business assets from IHT (40%). At the moment, the test to determine whether or not a business qualifies for BPR is that 51% of the business must come from trading (as opposed to investment income such as rent). This involves looking at the assets, the income and the profits in the round. The OTS suggests a much higher percentage – 80%. (This includes Furnished Holiday Lets).
Comment: This will adversely affect traditional mixed “landed” estates, many of whom have hitherto avoided IHT on the whole of the estate because the farming element meets the main test. (80% would be a real “stretch”).
- Gifts on death or in lifetime
At the moment, lifetime gifts incur Capital Gains Tax (CGT) except where holdover relief can be claimed but (usually), no IHT. Assets bequeathed on death might incur IHT but no CGT (termed the CGT-free uplift on death). The OTS recommends that assets exempt from IHT because of BPR, APR or the spouse exemption should not get the CGT-free uplift.
Comment: This would mean, for example, that beneficiaries of an IHT exempt AIM* listed portfolio of trading companies would have to pay CGT (currently 20%) not by reference to the market value of those companies at date of death, but to the original cost to the deceased. This in turn could lead to a significantly higher CGT bill on sale. Further, in a separate recommendation the OTS hints that AIM shares should not qualify for BPR, in which case the CGT uplift on death would still apply.
* Alternative Investment Market.
- Surviving a lifetime gift
Currently, assets given away during lifetime will only be 100% exempt from IHT if the donor survives 7 years (from date of gift). The OTS recommends that the 7 year period be reduced to 5 years.
Can qualify for 100% exemption from IHT. Farmers who have to go into hospital or a care home can be denied IHT exemption on the farmhouse. The OTS recommends that HMRC becomes more sensitive to such situations and that they should provide more clarity around their tests for the eligibility for exemption from IHT on farmhouses.
HM Government has a history of ignoring advice from the OTS! But don’t count on it. If you are thinking of making provision to reduce IHT, the message is get on with it.