Inheritance Tax is a tax payable on your estate when you die. People often assume that inheritance tax only applies to the very rich, but with rising house prices in Scotland this isn’t the case. If your estate is above £325,000, you could be liable for this tax. Your estate can include your home, jewellery, savings, cars and even works of art. Inheritance tax planning is all about passing on your estate exactly as you intended – without HMRC taking too much.
The Office of Tax Simplification (OTS) produced its second report on inheritance tax in July 2019. The report makes a total of 11 recommendations aimed at streamlining the current inheritance tax rules. Annually around 275,000 estates are required to submit inheritance tax returns, but fewer than 25,000 estates actually have a tax liability.
The report looks at the taxation of lifetime gifts; who is responsible for paying the tax on lifetime gifts; whether the exemptions available currently could be simplified and reviews exemptions for businesses.
The latest OTS report includes the following recommendations:
- A single personal gift allowance to replace the existing lifetime gift exemptions and a higher personal gift exemption to cover regular gifting out of income.
- Shortening the 7 year period for lifetime gifts to 5 years and abolishing taper relief.
- Simplification of the rules on the liability for paying inheritance tax on gifts and how the £325,000 threshold is allocated among the gifts.
- Changes to the interaction of capital gains tax and inheritance tax on farms and businesses where the underlying policy is to enable these to be passed to the next generation rather than being broken up.
- An automatic exemption for term life assurance policies avoiding the need for use of a trust.
- Review of the pre-owned assets tax rules which are complex.
The recommendations represent a simplification of the existing rules rather than a widescale review of the current inheritance tax regime and the possible alternatives to inheritance tax. It will be for the new Chancellor to review the OTS Report and respond. It is fair to say that this may not happen any time soon, given what else he will have in his in tray, but if implemented the recommendations will bring changes to a tax regime that has remained largely unaltered since the 1980’s. However, it is also acknowledged that the current uncertain political situation could bring more widescale changes to inherited wealth, particularly under a Labour Government.
Fiona Fleming, Partner, Blackwood & Smith