Following an unprecedented level of engagement by the private client industry, the OTS published its wide-ranging review of IHT in July 2019. The report clearly, and in some detail, sets out the main complexities and technical issues arising from gifting, IHT and the current exemptions.
Numerous proposals are made within the OTS report and this article only considers some of the key proposals relating to lifetime gifts, Capital Gains Tax (CGT) and issues surrounding business property relief (BPR) and agricultural property relief (APR).
Currently the IHT rules say that if you make a gift within 7 years of your death, it falls back into your estate for the purposes of calculating IHT. If the gift is above the nil rate band allowance, taper relief will apply.
Under the current rules you can make annual gifts of up to £3,000 per year and carry forward the annual gift once, giving you a reduction of £6,000 against IHT. Small tax free gifts of £250 can be given each year to a recipient of your choice. You can also make gifts in consideration of marriage or civil partnership.
The recommendations in relation to the 7 year rule, abolition of taper relief and the proposed introduction of an overall personal gift allowance are sensible and to be welcomed. They would simplify the rules considerably and make it easier for individuals (and their advisers) to think about gifting and estate planning.
Unfortunately, the report did not go so far as to say that the nil rate band (currently at £325,000, where it has been for many years) should be increased or that the residence nil rate band (which is complex) be re-considered, merely noting that the latter is still very new and more time is needed to evaluate its effectiveness (or not!).
Generally (and probably reasonably), no capital gains tax is payable on death and where IHT otherwise applies.
The report suggests that the government should consider removing the CGT uplift where a relief or exemption from IHT applies, and instead the recipient should be deemed as having acquired the asset at the historic base cost from the person who has died.
In a sense, the recommendation is logical in that where an asset would be exempt from IHT anyway (due to the application of a relief or exemption), why shouldn't CGT still apply on a later disposal?
However, the recommendation is also quite radical and it would have a significant impact. The government should give this very careful consideration.
An estate can claim both BPR and APR from IHT. The reliefs are to prevent any break up of a company business following death of an owner and there are currently differing requirements needed to qualify for the exemptions in comparison to similar reliefs for CGT. A level of trading activity has to be evidenced for BPR to apply.
Certainly any reform to APR (and HMRC's approach) would be most welcomed as the relief can be difficult for executors to claim, particularly with elderly or ill farmers.
The recommendations in relation to BPR are potentially significant. Aligning the BPR trading test with the tests for gift holdover relief and entrepreneurs' relief would be a simplification but may also make it harder to claim BPR.
The report also notes that the availability of BPR for AIM shares may not be in line with the policy behind BPR generally (to prevent farms or businesses being broken up). It stops short of making any particular recommendations but if BPR was removed from AIM shares that would have a sizeable impact on IHT planning and investment management.
The recommendations around the inconsistencies of the treatment of LLPs and holding companies are also welcome.
Generally the recommendations are sensible and deserve a (cautious) welcome from individuals and advisers. However, it will be interesting to see how the proposals are taken forward (if at all) and the eventual impact on an individual's estate planning and IHT could be significant.