‘Simplification’ of Inheritance Tax: what’s not to like?

You may have seen that in July the Office of Tax Simplification (OTS) published proposals for the simplification of inheritance tax (IHT).

When chancellors and review bodies talk about ‘simplification’, tax experts generally groan. Experience teaches that the result is rarely simplicity; just different complexities. Generally, every change produces winners and losers.

Some of the proposed changes (such as reducing from seven years to five the time that an individual must survive after making a lifetime gift) are very welcome, but others are more cause for concern.

Ironically, the most striking proposed change relates to capital gains tax (CGT) and its interaction with IHT. When an asset passes on death it currently benefits from a CGT ‘uplift’. The proposal is that this uplift would not be available where the property benefits from an IHT relief or exemption.

Without an uplift, a disposal of the asset by the recipient would trigger tax not only on any gain during their own period of ownership, but also on any gain accrued by the person who has died, potentially creating a much bigger CGT bill.

No uplift would also restrict the ability to undertake fairly basic tax planning – for a surviving spouse to inherit assets and pass them on to the children with the benefit of the CGT uplift on the death and free of IHT once seven years have passed.

Other potentially significant changes could affect the owners of businesses which have a mix of trading and investment assets. At present, if IHT business property relief is to apply, the business only has to show that at least 50% of its assets are trading. Following the CGT rules instead, as suggested, could increase the figure to 80%. This could impact a substantial number of businesses, particularly those which have carefully structured themselves to satisfy the current rules.

It cannot be known whether these proposals will be enacted as they stand, for this is not a report setting out a government’s firm intentions: the OTS is an independent office of the Treasury whose task is merely to advise.

One thing is certain however: these proposals render it all the more essential to implement regular reviews of planning for IHT – and for CGT too.