Inheritance Tax Simplification – Perhaps

On Friday (5th July) the Office of Tax Simplification (OTS) published their second report on the simplification of Inheritance Tax (IHT). You only need to read the report to see how complex it is at present. They have made some recommendations for changes but they are relatively minor. Major changes were ruled out. Even the suggested changes need to be accepted by the Treasury so they may not be implemented, and even if they are it appears likely that they would not happen quickly. These are some of the key proposals:

  • Exemptions for gifts might be simplified. For example, the exemption for “normal expenditure out of income” is unclear in effect and requires detail record keeping for many years which few people are capable of doing. They suggest it be replaced with a higher personal gift allowance. Tip: keep a spreadsheet of all income and expenditure (including gifts) if you are making personal gifts at present.
  • The 7-year period after which gifts are free from IHT also creates problems in record keeping (even bank statements are not retrievable after 6 years), particularly as it can extend to 14 years. Taper relief is another complication. The proposal is to scrap taper relief and have a simple 5-year rule for exemption.
  • The residence nil-rate band introduced a lot of complications in IHT calculations and received a lot of negative comments but they don’t propose to remove or simplify this area as they say it’s still relatively new and more time is required to evaluate its effectiveness. But it says some solicitors choose not to advise clients about this concession because it is so complicated!
  • They propose no change to the provision that reduces the IHT tax rate on all assets to 36% if a person leaves more than 10% of their estate to charity despite the fact that it is little used. Note: this is a very useful facility so if you have a will that does not include such a provision then you need to review it because it can reduce your overall IHT bill.
  • Business property relief, particularly on “unlisted” AIM shares, was considered in the review. It questions whether third party investors in AIM traded shares meet the “policy objective” of Business Property Relief (BPR). But it makes no specific recommendation other than noting that removing APR (Agricultural Property Relief) and BPR would fund a reduction in the main rate of IHT to 33.7% from 40%. However it does point out the anomalies in determining whether a business is trading or is just an investment vehicle and in non-controlling shareholdings held indirectly. It suggests this be reviewed.

Is there a threat to IHT relief on AIM shares? It is not clear that there is and certainly not in any short-term time frame. In any case, investing in AIM shares simply because they offer IHT relief is a bad policy. Investment should never be driven by tax considerations. In addition the requirement to hold them for 2 years makes for dubious trading decisions and the complexity in record keeping if one trades in the shares of AIM companies can be mind-boggling.

In summary the proposed changes, even if HM Treasury supports them, are not going to simplify IHT that much. You will still need to take expert advice on this area of your financial affairs and tax accountants will not be put out of work. There is no revolution proposed.

You can read the OTS report here: https://tinyurl.com/y65jubxz

Or read my original comments on what should have been done here: https://roliscon.blog/2018/05/31/inheritance-tax-review/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Inheritance Tax Review

The Office of Tax Simplification (OTS) have published two items that will be of interest to investors. Firstly they have called for evidence to support a review of Inheritance Tax (IHT) and secondly a note on “routes to simplification” of the taxation of savings income. The latter is horribly complex so I will deal with that later in a separate post.

Inheritance tax is slightly less complex but since recent Chancellors decided to use it as a sop to the middle classes with such rules as the ability to leave property to children and grandchildren of up to £1 million, it’s been getting a lot more complex. It’s now reached the level where few people understand it and what effect it may have even when their tax affairs are otherwise relatively simple.

Part of the problem has been rising property prices. More than 14,700 homes were sold for more than £1 million last year according to Lloyds, and a lot of those will have been in London and the South-East. The Government sees it as a popular political stance to enable such homes to be passed on to children, rather like one can pass on certain pensions now, while not requiring their sale to meet medical or social care in later life.

Rather than simply raise the inheritance tax threshold, to stop the rapid increase in the number of people who are liable for inheritance tax (although that’s still less than 5%), the clever folks in the Treasury devised alternative rule changes that ameliorated the impact of increasing property wealth for certain sections of the population (e.g. property owners). But those who have to act as executors and deal with probate are faced with increased complexity.

You can see the impact of rising property prices if you know that IHT is charged at 40% and applies to assets as little as £325,000 (that’s where the nil rate band ends) – so almost everyone living in London may pay it if they have no close relations or other “allowable” exceptions such as business assets.

It’s not just property that causes complications though. Unlisted companies such as AIM stocks are business assets and hence with typical private investor share portfolios now often holding a significant proportion of such shares these complicate the calculation. That is particularly so as not all AIM shares qualify and they need to have been held for some years.

The OTS are keen to hear from individuals as well as professionals with an interest in this area. There is an easy on-line survey you can complete here: https://www.gov.uk/government/consultations/inheritance-tax-review-call-for-evidence-and-survey

Please help them by responding. You can also send comments to them via email to: ots@ots.gsi.gov.uk . You might suggest to them that the present arrangements seem to generate work for tax accountants while baffling the general public but at the same time generating very little in revenue to HMRC. It’s certainly a tax that requires simplification. The original objective of inheritance tax seems to have been the socially beneficial aspect of preventing large wealth being passed on and accumulating through the generations. But at present the rich mainly avoid it – they set up trusts or move to another country. Meanwhile the middle classes tend to pay it and suffer the absurd complexity at the same time.

Here are some personal suggestions from me for simplification:

  1. The nil rate band should be raised to £2 million – effectively covering most normal family homes and avoiding the need to sell the house to meet IHT liabilities for children still in occupation. The Osborne changes that permitted property to be passed on should be scrapped.
  2. The IHT exception for AIM shares should be abandoned. The complexities of what may or may not qualify for that make planning difficult and potential savings on IHT are a poor reason or motivation for buying high-risk AIM shares. The desire to encourage investment in early stage companies is hardly a justification for most retail investors as they can rarely buy AIM company shares in IPOs and management/founders have other tax incentives such as entrepreneur relief. If such encouragement is required then other tax concessions (e.g. on capital gains) might be better.
  3. The seven-year rule for exemption of gifts is actually more complex than it first appears to be and can extend more than 7 years if multiple gifts are made I understand. Together with the tapering of such relief, it can become difficult to predict the likely liability particularly as forecasting when the donor might die is usually not easy. I suggest this relief be restructured to provide more certainty about the tax liability and it’s worth considering switching to a tax on gifts received.
  4. The existing IHT rate of 40% should be reduced as it encourages complex, and expensive, tax planning. A lower rate of tax might actually encourage more people to pay it rather than go to the trouble of setting up complex plans to avoid it.

In summary IHT has become too complex and needs to be simplified. However it’s worth bearing in mind that individuals have often planned their financial affairs based on existing tax rules. Abrupt changes to tax rules and allowance should be avoided.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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