Inheritance tax (IHT) rules could be about to change – again – meaning all those carefully devised wealth succession plans may need an overhaul.
This July the Office for Tax Simplification (OTS) released a second report into IHT - Simplifying the design of Inheritance Tax – which it hopes will make this ‘unpopular’ and ‘emotive’ tax charge more palatable and understandable.
At the same time, IHT provides much needed revenue to the government.
Receipts from IHT hit a record £5.4bn in 2018/19 and are forecast to reach £6.9bn in 2023/24.
While the OTS can only make recommendations rather than set legislation, the Chancellor – whomever that may be post-election – is likely to take a close look at the proposals when deciding future policy.
This means advisers may need to revisit some of their approaches to IHT planning to ensure clients’ wealth succession plans remain tax-efficient.
The fundamental principles of IHT planning remain the same irrespective of the tax rules.
The first rule is to start early; getting a plan in place as soon as possible can help maximise gifting exemptions and planning opportunities.
The early stages of planning should ideally take account of all members of the family to fairly balance any planning actioned during lifetime with wealth transfer plans on death.
It is of course vital to determine how much income is required in retirement and how long this may need to last.
As all advisers know all too well, this is complex since it involves an assessment of lifestyle, health and life expectancy, as well as taking account of the effect of inflation.
Once income requirements have been agreed and if surplus assets are available, IHT planning should be considered.
There are several tax efficient ways to pass on assets, but these have different constraints and obligations, and the rules may yet change.
Often the simplest route to bypass a 40 per cent IHT bill is to gift cash or assets.
A person may be eligible for several IHT reliefs when making a gift during their lifetime, including the annual exemption of £3,000 and gifts from ‘normal expenditure out of surplus income’.
For larger gifts to be fully exempt from IHT they must be made at least seven years before death.
The OTS proposes that the small gifts allowance, currently £250, is increased to a more meaningful figure.
They also recommend replacing the annual gifts allowance and wedding gifts with a single, larger personal gifts allowance.
Interestingly, the OTS suggests reducing the seven-year gift assessment period to five years.
As just £7m of the total £4.4bn IHT netted in 2015/16 came from gifts people made more than five years before their death, this change would not make a great dent in government revenue.
Even if the rules on gifting are simplified, advisers should bear in mind that once an individual makes an outright gift, they would have to forfeit any future access or benefit to ensure the gift remains tax efficient.