Over the last couple of weeks there has been speculation in the press that the Chancellor could look to make further changes to Inheritance Tax (IHT) in addition to the soon to be introduced changes to Business Property Relief (BPR) and Agricultural Property Relief (APR) and in relation to undrawn pensions.
Although IHT tends to be one of the most hated UK taxes, the vast majority of estates do not actually pay it because of the existence of various reliefs. Even so, with the freezing of the tax-free nil rate band more than 15 years ago (and with no sign of this changing) and the increase in the value of residential property, the revenue generated by IHT has almost doubled in the last 5 years alone and now exceeds £8 billion per annum. This is relative drop in the ocean when compared to the amounts generated by other taxes and only represents about 1% of the total annual tax take.
But with the current sizeable hole in the budget and the various promises made about protected some other taxes, could further changes to IHT be used as a way to plug even a little bit of the gap, and if so, what would that look like?
Past proposals
Around the time of the Conservative and Lib Dem coalition, a proposal for 11 changes to the UK IHT system was being discussed. Before any of this was implemented, the Brexit referendum took place, keeping the then Government rather busy for the next few years and (most of) the proposals were mothballed.
However, with the gaping hole in the public purse growing ever wider, every little helps and perhaps now is the time to revisit these, rather than trying to invest a whole new set of proposals.
Many of the suggested measures were purely practical:
- increased focus on awareness and education of the public to prevent accidental non-compliance;
- increased powers for HMRC to investigate lifetime gifts and estate valuations (and the latter has definitely been implemented in recent years!); and
- compulsory reporting of lifetime gifts.
If implemented, it is assumed that these could increase the tax collected slightly by picking up more of what should be taxed but which falls through the cracks. But these measures would not in themselves have any major impact on the way people plan for minimising IHT.
One proposal which was implemented (although perhaps not exactly as envisioned) centred on the taxation of excluded property (Offshore) trusts. That has come to fruition in recent times with significant changes in both 2017 and in the current year. As yet, it is too early to judge quite how much the latter change will impact on the tax collected – if at all, given the reaction by many “non-doms” and others who have joined the exodus from the UK.
The three main proposals which could, if implemented, affect a wider group of people and which would a significant impact on IHT planning were:
- Introducing a cumulative lifeline gifting cap. At present, provided a gift is made more than seven years before death it escapes IHT, as do (unlimited) gifts out of income. If this proposal were to go ahead, it could bring an end to some of the staple planning techniques currently used to reduce IHT and trigger a charge to tax ever time a gift in excess of the allowance was made. Without a gifting register this could be hard to police. However, many countries already operate taxes on gifts and so there is precedence for it.
- Extending the so called “seven-year rule” was also considered. As above, any gifts made more than seven years before death are ignored when calculating IHT on death. Extending this to 10 years could potentially bring in more value to the death estate, as well as lining up nicely with the 10-year tail imposed upon those leaving the UK under the new residency-based regime. This feels like a real possibility, although the impact might not be particularly lucrative in reality.
- Where someone does not survive seven years, currently taper relief operates to reduce the tax payable on gifts made at least three years before death. Whilst this only applies if tax becomes available (because the nil rate band has been exceeded or used elsewhere), for larger gifts this can provide significant savings, and can minimise the cost of insuring against IHT on lifetime gifts. The proposals sought to abolish this entirely, which would push up the cost of insurance premiums, if nothing else.
Presumably, the current Government were not involved in the proposals which are now over a decade old and so would not be caught recycling them. However, as the gap between spending and tax revenues continuing to grow, it seems like nothing is off the table.
Of course, some believe that IHT should be scrapped entirely, and replaced with either wider reaching capital gains tax legislation, or a wealth tax, or a tax on all gifts in an attempt to increase revenues. Or perhaps the current 40% rate could be increased or the nil rate band could be reduced in actual terms rather than just real terms to bring more estates into charge.
At this point, this is all pure speculation and only time will tell what the Government has in store for this already very controversial tax.
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