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How will reforms change Inheritance Tax planning?

View profile for William Ware
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Sweeping reform of Inheritance Tax (IHT) has been recommended to cut complexity of the so-called ‘death tax’, but experts are warning that individuals will need to review existing planning if the changes go ahead. William Ware, Senior Partner and Wills and Trusts expert within our Private Client team, here reviews the proposed reforms and how you can prepare now for any changes.

Headline recommendations to Government from the Office of Tax Simplification (OTS), the independent adviser on simplifying the UK tax system, making recommendations and the consultation and subsequent reporting on IHT, include changing the rules surrounding gifts of cash, property and other assets made while someone is still alive, and an overhaul of the relationship between IHT and Capital Gains Tax for farm and business assets. 

What will the proposals change?

Proposals include a simplification of several areas:

  1. Exemptions and allowances - The lifetime gift exemptions to a single personal gift allowance would be simplified, with a revised threshold for small gifts and reform of the regular gift out of income exemption.  
  2. Seven-year gifting rule - The OTS recommends that the current seven-year gifting rule for potentially exempt transfers be cut to five years. This is the period which must elapse from the date a lifetime gift is made until the date of death for the gift to be exempt from IHT. 
  3. Taper relief – By changing the seven-year gifting rule, this would also see an end to the complicated taper relief by which the tax charged on gifts may be gradually reduced from year three of the current seven-year period.  
  4. Who is to pay IHT - Where IHT is due on lifetime gifts, the rules on who is liable to pay the tax should be simplified, and how the £325,000 threshold is allocated between different recipients.
  5. Reliefs available for businesses and farms – Currently when it comes to passing on a farm or a business, different tests are applied depending on whether the disposal is following death or during lifetime, as the rules are different for IHT and Capital Gains Tax. It can be complex and has an impact on decision making because of the different tax outcomes for effectively the same action and so the OTS proposals would see this simplified.

Another factor to consider in any future inheritance planning is the Government’s pledge to extend civil partnerships to opposite-sex couples, following the Supreme Court ruling that restricting them to same-sex couples was discriminatory. Proposals are currently out for consultation, but the Government Equalities Office has said they hope that the option will be available by the end of 2019. The right to enter into a civil partnership would give opposite-sex couples the same IHT exemptions as those enjoyed by married couples and same-sex civil partners.  

What can I do now if the reforms are approved?

“Wills may need to be re-written to benefit from any tax reform that takes place, as someone who has drawn up their Will to reflect the current regime may risk a very different outcome to what was intended if their estate is taxed under the new regime," comments William. “That will certainly be the case if the rules change on where liability for tax falls between those receiving lifetime gifts and those who inherit on death, with some of the proposals on allocation of liability having wider implications that will need to be considered.” 

If you have any questions regarding these reforms, or would like to discuss your estate or IHT planning with William, you can contact him today on 01329 222075 or email privateclientenquiry@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.