Benjamin Franklin referred to the ‘two certainties – death and taxes – and inheritance tax (IHT) has combined the two in pretty much the same form since 1984.
Now, however, the tax is in the gunsights of both the major parties, according to James McNeile, a partner in the private client team at law firm Royds Withy King.
In January 2018, former chancellor of the exchequer Philip Hammond asked the Office of Tax Simplification (OTS) to review both the administration and technical aspects of the tax and the second of their reports was released in July.
The report is detailed and involved consultation over a long period with representative bodies and interested parties across the political spectrum.
The Labour Party report on land ownership ‘Land for the Many’ edited by George Monbiot and released in June also looked at inheritance tax and land and, coincidentally, made some suggestions which are also considered in the OTS report.
Recommendations
The OTS report has a number of recommendations of which the most striking are:
- The introduction of an annual inheritance tax allowance for gifts which applies equally to all, rather than favouring the more wealthy. A possible figure mentioned for this is £25,000 and the removal of the automatic uplift of asset base costs for capital gains tax purposes on death – possibly only to continue to apply if IHT is paid. This would prevent uplift in base costs for business assets and properties passing to a surviving spouse and is intended to stop distortion of decision making by tax considerations;
- The removal of IHT relief for some assets which currently qualify – for instance AIM quoted shares – but the softening of qualification rules for other businesses, including furnished holiday lets; and
- Simplifying rules about the IHT treatment of life insurance proceeds and pension death benefits.
It also comments on the very complex arrangements around trusts, including those for vulnerable individuals, but stops short of making recommendations because there is a separate ongoing HMRC consultation on this subject.
Labour’s plans
Further details of Labour’s IHT plans have been released piecemeal, but essentially amount to replacing IHT with a lifetime gift tax similar to ones applied in many other parts of the world and calculated not by reference to the wealth of the donor (as currently the case in the UK) but rather the amount received.
The report itself is focused on land ownership but the concepts have been developed further in comments by leading members of the shadow cabinet.
The Labour plans, which are the subject of further review, appear to involve a lifetime tax on all gifts by parents to their children in excess of a lifetime allowance of £125,000 ($152,000, €136,000) for each recipient. Gifts over that amount would be taxed as income in the hands of the child and so taxed on them as a top slice of income.
The US has a similar lifetime allowance but at a rather higher level – some $11.4m (£9.35m, $10.2m) in the current year. The Labour Party estimates that it will nearly triple the current yearly take under Inheritance Tax (£5.4bn) to some £15bn in 2020/21.
This indicates that if there is a change of government, implementation of radical reform will follow quickly.
Increase in payments
The proposals will see a substantial increase in the number of those affected by IHT and the levels of tax to be paid and will create particular problems surrounding gifts of family homes. With the average national house price standing at just over £230,000 and £480,00 in London, many people who do not consider themselves wealthy will be caught up in this new tax.
This contrasts with the current government which has pushed towards an allowance of up to £1m for transfer of a home, on death, to a child.
Anyone considering a gift of land or cash would be well advised to prepare to make it before any potential change of government, but even under the government’s own commissioned report, there are changes which will wholly alter common arrangements for transfer of wealth.
Some will help and some will hinder, but one thing that is clear is that for a tax currently paid by only 5% of those dying each year, changes are afoot.
This article was written for International Adviser by James McNeile, a partner in the private client team at law firm Royds Withy King.
