Inheritance tax reform advice
Many trading businesses have enjoyed a tax system that has allowed succession to take place with little or no tax liability. Generous reliefs from InheritanceTax (IHT) and Capital GainsTax (CGT) are available, and even on death the trading business usually passes to the beneficiaries with little or no tax due.
The Office for Tax Simplification (OTS) recently reported to the Chancellor, outlining eleven recommendations for the reform of IHT, therefore some changes to these tax reliefs may be ahead.
What might these changes look like?
The recommendations cover lifetime gifts and the interaction between IHT and CGT. Many people are aware of the seven-year clock that starts when one individual makes a gift to another. Many people are also aware of the annual IHT exemption of £3,000, a figure which hasn’t changed since the 1980s. The OTS has recommended replacing the annual exemption and the marriage gifts exemption with an overall personal gifts allowance, and recommended that the level of this exemption and the small gifts exemption are reviewed. There is also a recommendation to reform the normal expenditure out of income exemption or replace it with a higher personal gift allowance.
A further key recommendation is a reduction in the seven-year period to five years, along with the abolition of the taper relief provisions that apply if tax becomes payable on a gift that has failed the seven-year test.
The second area considered by the OTS relates to the interaction between IHT and CGT. Currently there is generally no CGT on death. Instead, assets form part of the estate subject to IHT and the value of the assets passed to the beneficiaries is re-based to the market value at the date of death. This means, for example, assets that are inherited by a spouse are free of IHT and can be sold shortly after with little or no gain over the date of death value. There is therefore no CGT due either.
The OTS has therefore recommended that the CGT rules be amended rather than the IHT ones, so that assets covered by any sort of IHT exemption will not be re-based to market value on death but will be inherited at the deceased’s original base cost.
If any of these recommendations are followed through by the Government, there are likely to be winners and losers. Whilst the reduction in the seven-year period following a gift would certainly be welcome, the change to the re-basing provisions would almost certainly see the tax liability of beneficiaries rise substantially, perhaps resulting in fewer disposals of inherited assets.
Our advice to business owners who have succession options available is to make use of the generous tax reliefs as they may not be available if legislation changes.
If you have any queries please contact John Gold, partner at Campbell Dallas, telephone: 01786 460 030 or email: john.gold@ campbelldallas.co.uk