Financial & Legal News

Unpopular tax due for review

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Making tax simple is part of a proposed review of Inheritance Tax – something which affects many of our clients.

Sarah Finnigan unpicks the issues:

Inheritance Tax is one of the most unpopular taxes of all time and something which affects many of us in one way or another, often at very sensitive times in their lives.

A recent independent review by the Office for Tax Simplification (OTS) has stated that the administration and technical aspects of the tax could be reduced if for example fewer people paid tax on gifts given shortly before death.

Other initiatives could be cutting the seven year rule to five, meaning that assets given away more than five years – as opposed to seven years – before the original owner died are not subject to inheritance tax.

It is stated by the OTS that seven years is an awkward time frame as bank statements more than six years old can be ‘difficult and time consuming for executors to obtain’ and that current gift exemptions are ‘complex and create confusion’. Annual gift exemption could in future be replaced with an overall personal gift allowance, with no suggestion as to how large this allowance should be.

These are the lofty aspirations of the OTS .  Basically the headline proposals if followed through would see implications for:

  • lifetime gifts, generally and in particular the necessity for the taxpayer to survive 7 years from the date of the gift before whatever has been given away (whether this is a house, a Ming vase or a sum of money) falls out of their estate for IHT.
  • those who have excess income and can currently give it away free of IHT.
  • the often complex interaction between capital gains tax and IHT which in simplistic terms can distort the timing of gifts so they are delayed until death rather than being made at a more opportune time during the donor’s lifetime.
  • certain aspects of the main IHT relief that applies to an interest in a Business (whether you are a sole trader, own a share in a partnership or own shares in your family business) concerned with the amount of trading activity a business carries out.
  • the treatment of furnished holidays lets which have for many years provided fertile ground for court cases and disputes between HMRC and taxpayers.

Of all the existing IHT reliefs, the one that causes most consternation for practitioners is the one that relieves the gift of a family home to direct descendants.  The IHT savings are not to be sniffed at – a band of £300,000 is currently relieved for a husband and wife (or civil partners) rising to £350,000 in April 2020 (so IHT savings at 40% equating to £120,000 rising to £140,000) - and the premise is admittedly simply. 

Unfortunately, the legislation is indigestible, particularly for taxpayers who have sold their large family home towards the end of their lives as part of a commonplace overall IHT planning strategy, which means the so called ‘down-sizing’ provisions need to be applied.

Bafflingly its very over-complexity (and its relative newness to the IHT arena) appears to be a reason for the OTS deferring reviewing this any further at this stage.

As with all well-intended tweaking, this consultation cannot be described as an overhaul unless its recommendations are followed through.  As ever, practitioners need to be braced for an increase in enquiries from concerned clients who will want to understand how they are affected by these proposals.

The report itself acknowledges that some of its recommendations will prompt people to change their Wills and at Pearson Solicitors and Financial Advisers we have a team of experts highly qualified in the areas of Wills, IHT planning and trusts on hand to discuss and allay client concerns – call 0161 785 3500 for a no obligation chat.





Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.

Written by Sarah Finnigan


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