Likely Changes to Inheritance Tax

This week the Office of Tax Simplification (‘OTS’) issued the first of 2 reports looking at Inheritance Tax (‘IHT.’) The 2nd is due in the spring and will explore key technical and design issues with the tax.

The OTS says the review has attracted an unprecedented level of public engagement and contribution. In a long article on 24th November trailing the report the Financial Times quotes it as saying ‘the IHT regime is too complex and confusing’ and needs a dramatic overhaul.

I think this will occur in the foreseeable future and it is likely IHT will be replaced by a gift tax. If you want to make lifetime gifts and access our present ‘7 year rule’ time is, I think, of the essence.

I set out below some points from the OTS paper:

  • a common criticism of IHT is that wealthy individuals can give away many of their assets before they die and pay less IHT than others who need to keep a greater proportion to support their living costs;
  • fewer than 3% of estates have a value above £1m;
  • Whilst IHT is set at 40%, research for the report shows the rate actually paid by the average estate is much lower. They say it peaks at just over 20% ‘for estates valued at £6 to £7m, after which it falls to 10% for estates with a value of £10m or more…The reason…. is that a greater proportion of their assets are likely to be covered by a relief. On average 70% of the value of an estate worth more than £10m is relieved in this way’;
  • The above statistics don’t take into account gifts made more than 7 years before a person’s death. Such gifts are not subject to IHT and HMRC does not collect data about them. It has recently commissioned external research on lifetime giving to obtain better data. It is expected that the results will be published in 2019.

As a tax and estate planning practitioner

  • I am surprised by the OTS’s research that for many estates the effective rate of IHT is circa 20%. This is not my experience especially where clients have sizable property assets;
  • I think HMRC is likely to bring in legislation better to track lifetime gifts;
  • I don’t expect a major overhaul of our IHT business property and agricultural property regimes;
  • I think our present IHT regime for lifetime gifts generous. There is no limit on the size of gift an individual can make in their lifetime free of IHT. If they are rich enough they can give away £1bn free of IHT if they survive 7 years and retain no benefit in the asset gifted. This compares to the US where the circa $11m threshold is (I understand) a lifetime allowance.

I say wills are the last communication of love you leave. Estate planning is part of that process. My recommendation is that people make use of the present IHT regime for making lifetime gifts before it is altered or even taken away.

If you think I can help you in thinking through/understanding the tax implications of different estate planning ideas please get in touch.

Robert Schon

29th November 2018.