On Friday (5th July) the Office of Tax Simplification (OTS) published their second report on the simplification of Inheritance Tax (IHT). You only need to read the report to see how complex it is at present. They have made some recommendations for changes but they are relatively minor. Major changes were ruled out. Even the suggested changes need to be accepted by the Treasury so they may not be implemented, and even if they are it appears likely that they would not happen quickly. These are some of the key proposals:
Exemptions for gifts might be simplified. For example, the exemption for “normal expenditure out of income” is unclear in effect and requires detailed record keeping for many years which few people are capable of doing. They suggest it be replaced with a higher personal gift allowance. Tip: keep a spreadsheet of all income and expenditure (including gifts) if you are making personal gifts at present.
The 7-year period after which gifts are free from IHT also creates problems in record keeping (even bank statements are not retrievable after 6 years), particularly as it can extend to 14 years. Taper relief is another complication. The proposal is to scrap taper relief and have a simple 5-year rule for exemption.
The residence nil-rate band introduced a lot of complications in IHT calculations and received a lot of negative comments but they don’t propose to remove or simplify this area as they say it’s still relatively new and more time is required to evaluate its effectiveness. But it says some solicitors choose not to advise clients about this concession because it is so complicated!
They propose no change to the provision that reduces the IHT tax rate on all assets to 36% if a person leaves more than 10% of their estate to charity despite the fact that it is little used. Note: this is a very useful facility so if you have a will that does not include such a provision then you need to review it because it can reduce your overall IHT bill.
Business property relief, particularly on “unlisted” AIM shares, was considered in the review. It questions whether third party investors in AIM traded shares meet the “policy objective” of Business Property Relief (BPR). But it makes no specific recommendation other than noting that removing APR (Agricultural Property Relief) and BPR would fund a reduction in the main rate of IHT to 33.7% from 40%. However it does point out the anomalies in determining whether a business is trading or is just an investment vehicle and in non-controlling shareholdings held indirectly. It suggests this be reviewed.
Is there a threat to IHT relief on AIM shares? It is not clear that there is and certainly not in any short-term time frame. In any case, investing in AIM shares simply because they offer IHT relief is a bad policy. Investment should never be driven by tax considerations. In addition the requirement to hold them for 2 years makes for dubious trading decisions and the complexity in record keeping if one trades in the shares of AIM companies can be mind-boggling.
In summary the proposed changes, even if HM Treasury supports them, are not going to simplify IHT that much. You will still need to take expert advice on this area of your financial affairs and tax accountants will not be put out of work. There is no revolution proposed.
You can read the OTS report here: https://tinyurl.com/y65jubxz
Or read my original comments on what should have been done here: https://www.sharesoc.org/blog/taxation/inheritance-tax-review/
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )