Neil MacGillivray: Is the Abolition of IHT on its Way?

  • On July 17, 2018
  • By GrowthInvest

If the current IHT regime’s days really are numbered, writes Neil MacGillivray, then advisers with clients who have held off making gifts for IHT planning purposes may want to get them to act sooner rather than later.

When Chancellor of the Exchequer Philip Hammond wrote to the Office of Tax Simplification (OTS) in January asking it to review inheritance tax (IHT), one had to wonder what the outcome would be.

On 27 April, the OTS published a call for evidence. On examination of the questions it asked, it is clear nothing appears to be safe from change. Responses had to be with the OTS by 8 June, with the aim of publishing a report in the autumn before the 2018 Budget, so we may not have that long to wait.

Now, my track record on predictions of possible changes to tax legislation is pitiable so I tend to try and avoid making them. Tucked away in economic thinktank Resolution Foundation’s Intergenerational Commission Report published in May, however, were recommendations for radical reform of our IHT system.

Part of the report’s basis for change was that inheritances and other gifts totalled £127bn in 2015/16 but only raised tax of £5bn – equating to an effective rate of just 4%. Between 2006/07 and 2022/23 IHT receipts are forecast to grow at less than a quarter as fast a rate as inheritances.

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Now, my track record on predictions of possible changes to tax legislation is pitiable so I tend to try and avoid making them. Tucked away in economic thinktank Resolution Foundation’s Intergenerational Commission Report published in May, however, were recommendations for radical reform of our IHT system.

Part of the report’s basis for change was that inheritances and other gifts totalled £127bn in 2015/16 but only raised tax of £5bn – equating to an effective rate of just 4%. Between 2006/07 and 2022/23 IHT receipts are forecast to grow at less than a quarter as fast a rate as inheritances.

So the thinktank has recommended the current IHT regime is scrapped and there is a move to a lifetime receipts-based tax assessed on the recipient. Similar receipt-based schemes are in operation in France and Ireland so it is not a new concept – the view being that such a change would deliver both practical and perceptual benefits and, not surprisingly, also increase tax receipts.

So how would it work? Individuals would have to keep track of cumulative receipts – however, gifts of £3,000 or less per donor per year, gifts between spouses/civil partners and gifts to charities would be excluded. The cumulative gift allowance would initially be £125,000 received tax-free, with the allowance being indexed in line with inflation

A basic rate of 20% would apply on gifts received between £125,000 and £500,000 with a top rate of 30% applying thereafter. The estimate is that such a change would generate £11bn annually compared to the forecast of £6bn under the current system.

So it would be farewell to both the seven-year cumulative gifting rule and the normal expenditure out of income exemption, thus removing many of the tax planning opportunities currently available.

Business relief and agricultural relief, which currently cost the Treasury £1.22bn, would also come under the cosh and be better targeted to remove any predominantly tax-driven motivation for owning the assets. The suggestions here are to cap the relief, increasing the minimum ownership period and limiting the relief to “real” farmers and business owners.

Trust Tax Regime
The trust tax regime, which is perhaps the most complex, would meanwhile be redesigned to reflect the lifetime receipts rules.

If none of that appears to be enough, the thinktank also recommends the tax-free treatment of pension funds inherited on death of the member before 75 be removed and made subject not only to the new regime but also liable to income tax.

Finally, it suggests also applying capital gains tax on death – though it may be restricted to additional residential properties and assets qualifying for business property relief and agricultural relief.

It may be that only some or even none of these recommendations are taken up. It does however give us an indication that the days of referring to IHT as a ‘voluntary tax’ – on the basis that, with careful planning, an individual’s liability may be reduced or even wiped out – may soon no longer be the case.

One thing that can be said is that, for those individuals who have held off making gifts for IHT planning purposes, now may be the time to act. Definitely a case of better the devil you know…

Click here to access the article.

Source: Professional Adviser

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