Office of Tax Simplification review of Inheritance Tax – Report 2

The Office of Tax Simplification has released its second report on the IHT system – and it makes much more interesting reading than the first.

There are 11 recommendations from the OTS, albeit the Chancellor has been quick to point out that “..changes to Inheritance Tax…are the prerogative of the Government and of Parliament”. This, of course, means that he is free to cherry pick those that have most appeal to him, and to a Government looking for opportunities to raise tax revenues.

The suggestion of a removal of the Capital Gains Tax uplift on death in situations where there is no Inheritance Tax to pay because a relief (such as spousal relief, business or agricultural property relief) applies carries a certain logic.

The proposal is that, if a relief applies on death, the gain will not be “wiped out” as  it is currently, but will be “held over” to come back into charge should the asset ever be disposed of.

Quite how the measure falls within the definition of “simplification” is difficult to see. Currently the tax payer needs to do nothing in relation to CGT on death. If enacted, this recommendation would lead to issues identifying which gains are wiped out and which are carried forward; not to mention the need to keep ongoing records of base costs should the asset be sold by a future generation.

As it is, however, a win for the Treasury,  I expect this may well be very carefully considered by the Chancellor.

There is also a suggestion that the qualification of “trading” for Business Property Relief (BPR) should be aligned with that for Capital Gains Tax reliefs. On the basis that it is unlikely that the Government will make Capital Gains Tax reliefs “easier” to obtain, the result would be to make Business Property Relief more difficult to access by raising the bar such that at least 80% of the activities of the business must be trading activities. Currently the threshold is 51%. For businesses that have diversified and have significant non-trading activities (consider farmers who let out unused cottages and farm buildings and take a rent) this measure would, in many cases, completely remove their entitlement to BPR.

One positive note for taxpayers is the suggestion that gifts made during lifetime fall out the IHT estate of the donor more quickly. Currently the value of a gift remains in the donor’s estate for 7 years before falling away. The recommendation is to reduce this to 5 years.

I would suggest that the potential revenue raising measures included within the OTS report will give the Chancellor more than enough scope to allow a “giveaway” such as this while still benefiting from a considerable increase in tax – which a cynic might say was the point of this exercise all along.