Valentine’s day is a day for showering our other half with love and affection, but for those of a less romantic disposition, it might also be an apt time to consider the question of estate planning.
“Who do you love more?” can be a great starting question to ask yourself to ensure your estate ends up in the right hands. I am certain HMRC will not be top of your list.
Whether the planned March budget happens has been thrown into doubt by the resignation of Sajid Javid and appointment of Rishi Sunak, however, an overhaul of inheritance tax (IHT) rules has been in the collective mind of the Treasury for some time.
Major changes to IHT were proposed by the government’s Office of Tax Simplification (OTS) in July 2019 and may reappear if next month’s budget goes ahead.
Inheritance tax is certainly complicated – especially for a tax that generates relatively little revenue. The OTS spent some 18 months looking at it and has produced two linked reports. The second and more important one, dealing with the structure of the tax, was published in July 2019, just as the man who commissioned it, Chancellor Phillip Hammond, left office.
The latest OTS report contained a wide range of proposals that could have a big effect on your estate planning.
• You should only have to live for five years – not seven, as now – before a lifetime gift ceases to be subject to IHT. At the same time, the little-understood taper relief should also be abolished. This can reduce the amount of tax payable on lifetime gifts made more than three years before death, but it applies to relatively few estates.
• The rules for IHT business property relief (BPR) should be aligned with those for capital gains tax (CGT), which would result in fewer businesses qualifying for the relief. Alongside this change, the CGT rules at death should be reformed.
• The current £3,000 annual exemption and the marriage/civil partnership exemption (up to £5,000 for parents) should be replaced with a new single ‘personal gifts allowance’. The OTS made no specific recommendation but it pointed out that the annual exemption would now be worth just under £12,000 if it had been inflation-proofed since its last increase.
• The level of the small gifts’ exemption (originally set at £250 in 1980) should be reconsidered. Again, the OTS made no specific recommendation but it did say that inflation-linking would have increased the amount to just over £1,000.
• The rules for normal expenditure gifts should be reformed or should be replaced by a higher personal gifts allowance. This exemption is potentially valuable, but according to the OTS is regarded as confusing, difficult to claim and often not included in planning.
• Pay-outs under term assurance policies should be free of IHT. Currently, it is necessary to write such contracts under trust to keep them out of the policyholder’s estate on death.
Philip Hammond responded to the report by saying that “The government will consider the recommendations…and will respond in due course”.
The new Chancellor may not have much time to prepare for 11th March and some suggest it may be a job too far for him at this early stage in his political career, but it could be that inheritance tax changes, which have been long needed, may be a headline grabber and much simpler challenge than the much touted changes to pension tax relief for higher earners. However, with Cummings apparently pulling the strings, don’t rule out a more radical stance from the Treasury.
Like most reforms, the OTS proposals would create winners and losers. To understand which category you would fall into, and any pre-emptive actions that can be taken with your financial planning, please talk to us.
In the meantime, you may wish to look at our Estate Planning guide and consider whether you love HMRC more than your beneficiaries.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.
The Financial Conduct Authority does not regulate will writing, trusts and some forms of estate planning.