All Change for Inheritance Tax?

Mike Downey, Director and Head of Lifetime Planning in South East Wales at JCP Solicitors, considers proposals for sweeping changes to Inheritance Tax that would potentially apply to thousands of people across the UK, if they were adopted.

A recent report by the Resolution Foundation, a government think-tank on behalf of the wonderfully named Office of Tax Simplification, has concluded that Inheritance Tax in its current state should be scrapped and replaced with a system which is fairer and harder to avoid.

The most fundamental change would be the shifting of the burden of the tax from the estate of the deceased to the recipient of the inheritance. The name of the new tax is proposed to be Lifetime Receipts Tax and this would be paid by the beneficiaries.

Under the mooted scheme, each person would have a Lifetime Receipt Tax Allowance of £125,000, indexed to inflation. Any inheritance received up to £500,000 (i.e. the first £375,000) would be taxed at 20 percent after the first £125,000, and then at a higher rate of 30 percent on any inheritance above £500,000. Lifetime gifts would be included in the tax, but there would still be the annual £3,000 allowance, and, importantly, normal gifts out of income relief would be abolished.

Transfers between husbands and wives and civil partners would still be exempt from tax, but an important change would be the proposed restriction in Business Property Relief and Agricultural Property Relief. For Agricultural Property Relief, a Farmer Test would be introduced, similar to the system in Ireland and France, whereby the overall assets of the beneficiary (including the inheritance) must comprise at least 80 percent agricultural property. There would also be a Family Business Test for Business Property Relief whereby the beneficiary must receive at least 25 percent of the business, and the donor must have had a demonstrable working relationship with the company.

Another important change would see the removal of tax-free treatment of personal pension pots inherited on death before 75. Currently, personal pension pots inherited in such a way are deemed to be outside an estate for the purposes of Inheritance Tax and can usually be paid before a Grant of Probate or Letters of Administration has been obtained.  A Grant of Probate is the document needed in order to administer a deceased person’s estate if they have left a will. Otherwise a Grant of Letters of Administration is needed if the person has died intestate - without making a will.

At present, everyone has a £325,000 nil rate band allowance for Inheritance Tax purposes, and if you are married and have children you can double the nil rate band on the death of the spouse (provided on the death of the first spouse, the whole estate was inherited by the surviving spouse). There is also an additional Residence Nil Rate Band available for your residence, as long as it is being left to a direct descendent. The Residence Nil Rate Band is currently worth an additional £125,000 per person, rising to £175,000 per person in tax year 2020/21, which, again, can be doubled upon the death of a surviving spouse. To qualify for the full relief, one’s property must be worth the value of the Residence Nil Rate Band, otherwise it is reduced on a pro rata basis.

Unusually for the Revenue, the definition of the term Direct Descendants is quite generous. It includes natural children, grandchildren, great-grandchildren, stepchildren, adopted children, foster children or children who are cared for under special guardian provisions. It also includes the husband, wife or civil partner of any of the above.

The proposed Lifetime Receipts Tax would be a revolutionary change for the way taxes on death are calculated and collected. However, the recommendation is simply a proposal at this stage, so we will have to wait and see whether the recommendations are put into effect.  In my opinion, it will take a bold government to implement the changes. But if they are put into effect, then it seems that it will be far harder to undertake effective lifetime planning to mitigate tax on death.

For more information about effective Lifetime Planning, contact Mike at: mike.downey@jcpsolicitors.co.uk or call 029 2085 5277.

For further advice, please contact our specialist Lifetime Planning solicitors by email on law@jcpsolicitors.co.uk or call one of our local offices:

• Swansea: 01792 773773
• Cardiff: 02920 225472
• Carmarthen: 01267 234022
• Caerphilly: 02920 860628
• Cowbridge: 01446 771742
• Haverfordwest: 01437 764723
• Fishguard: 01348 873671