Financial Planning
Possible changes for Inheritance Tax rules The detailed report from the Office of Tax Simplification (OTS) – Simplifying the design of Inheritance Tax (IHT) – is a lengthy read at 107 pages! If you don’t fancy a bit of bedtime reading then don’t worry, we’ve pulled out some of the highlights relating to IHT. Lifetime gifts We spend a lot of time talking to clients about the available gift allowances, with cashflow planning helping to highlight what someone can or cannot afford to give away. It’s apparent however that the various gift allowances are confusing. There are lots of types of ‘gifts’ – annual, small, wedding, gifts out of income – and there is a suggestion to do away with these and have a single annual allowance.
The seven-year rule It is relatively well known that large gifts can be made, as what is known as a potentially exempt transfer (PET), the donor must survive for at least seven years. Of course the rules are much more complicated than that, but the general understanding is that such
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gifts will have an impact on IHT if you die within seven years of giving them. The report proposes that this sevenyear term is reduced to five years. A common issue with estate planning is people leaving it late in life to start IHT planning, by which point seven years is a potentially long time to survive, and therefore carrying the risk that larger gifts will ‘fail’. As such, reducing the time by two years would be a welcome move. Tied to the above is the idea to remove the taper relief. We often speak to people who get confused by the taper, not understanding that it is a taper on the tax due rather than of the amount gifted. Taper is only available when the gift (or cumulative gifts in the previous seven years) is over the nil rate band, currently £325,000. There is also what is known as the ’14-year rule’ which is even more
confusing! The idea is to scrap this, which would certainly make tracking gifts and establishing any tax due a much simpler task.
Capital Gains Tax There are a number of interactions between Capital Gains Tax (CGT) and IHT, which make planning essential but which can cause surprises to those unaware. The worst-case scenario for many would be gifting assets in their lifetime – thus triggering a CGT liability – and then passing away within seven years of that gift, and paying (additional) IHT as a result of the failed PET. It is relatively well known that there is a capital gains ‘uplift’ on death, even in the common scenario whereby assets are simply passed to a surviving
