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Industry reacts to OTS’ IHT report

Thursday, 11 July, 2019

Expert comment is appearing on the Office of Tax Simplification's (OTS’) report on the design of inheritance tax (IHT).

Most are favourable, especially regarding the reform of lifetime gift exemptions and the reduction of the seven-year potentially exempt transfer limit to five years.

However, there are some warnings regarding the OTS’ proposal to align the rules for businesses' trading thresholds across business and agricultural relief from IHT (currently 50 per cent) and capital gains tax (currently 80 per cent). Lifting the business property relief threshold would be a significant change and, if adopted, many businesses with significant investment assets may well face IHT in the event of a death, commented law firm Boodle Hatfield.

'Raising the bar for the level of trade that businesses need to undertake in order to claim business or agricultural property relief would be challenging for many small rural businesses that currently rely on this relief as part of their long-term succession planning', agreed Peter Harker of Saffery Champness.

The Institute of Chartered Accountants in England and Wales (ICAEW) also criticised the suggestion that liability for tax on lifetime gifts should be transferred from the gift recipient to the estate.

'Although this may be simpler from HMRC's viewpoint, complications can occur such as where the estate is then left to a different beneficiary to the recipient of the lifetime gift...There would also be a problem if the tax on the lifetime gifts came to more than the funds in the estate', it said. 'Professional executors may be reluctant to act in this situation.'

John Bunker TEP of the Chartered Institute of Taxation noted the proposal to remove the capital gains uplift when an asset such as a farm or other business is passed on at death or is otherwise exempt from tax, for example between spouses or by foreign domiciliaries, so the recipient is treated as having acquired it at the historic base cost it was acquired at by the person who has died.

'This is a brave proposal as there would be significant losers from it', he commented. 'But it can be seen as removing an anomaly and levelling the playing field between lifetime giving and death transfers.' The ICAEW called the idea 'sensible in certain situations', while Saffery Champness' Harker warned that it would require a 'fundamental review of many taxpayers’ wills and associated succession planning'.

But some commentators doubted that the Treasury would pay much attention to the OTS report. 'Government usually initially reacts to such reports with a variation on, “Thanks very much, we'll think about it and let you know”', said Terry Jordan TEP of BKL Tax.

Graham Boar TEP of accountants UHY Hacker Young was even more sceptical: 'The traditional passage of these reports has been for the OTS to spend 12 months researching and coming up with suggestions, the Chancellor of the day saying “thanks very much” and then depositing the findings in his cylindrical filling cabinet before pressing on with his own agenda.'

However, he added, this report was actually commissioned by the current Chancellor of the Exchequer, so this time may be different.

In any case, the OTS review was forbidden to examine one of the most complex of IHT provisions, the residence nil-rate band, as it is too new and needs to bed in. Moreover, the OTS was also told to steer clear of trusts, because HMRC is already looking at separate changes to trust taxation.