Office of Tax Simplification Inheritance Tax Review

[PinkDalek]

Luthrin, over at Stockopedia, has today summarised the Office of Tax Simplification's second report.

https://www.stockopedia.com/content/sma ... omment=5#5

I've yet to study the detail but the post (short extract only) includes this, quoting from the report:

“Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.” and then read on for the potential implications.

The 107 page report itself is here:

Policy paper
OTS Inheritance Tax review: Simplifying the design of the tax
This second report makes recommendations to make substantive aspects of the design of Inheritance Tax simpler, more intuitive and easier to operate.

https://www.gov.uk/government/publicati ... of-the-tax


If you have any comments, please concentrate on the practical implications, as against talk about whether or not IHT or CGT is good or bad etc.

[PinkDalek]

In so far as I am concerned, if Business Property Relief continues to shelter some of an Estate's assets from IHT, then the fact that beneficiaries may not get a uplifted CGT base cost on death is something manageable given the current CGT rates, CGT reliefs and exemptions etc. Beneficiaries would not generally be forced into a disposal and could plan accordingly.

[Lootman]

if Business Property Relief continues to shelter some of an Estate's assets from IHT, then the fact that beneficiaries may not get a uplifted CGT base cost on death is something manageable given the current CGT rates, CGT reliefs and exemptions etc. Beneficiaries would not generally be forced into a disposal and could plan accordingly.

If CGT were no longer to be rebased upon death for qualifying AIM shares, then wouldn't investors simply "Bed and ISA" their AIM holdings? Whereupon CGT won't apply anyway? Or better yet, buy them for an ISA in the first place, which is what I have mostly done.

My worry would be more what the article suggests. Anything that reduces the attractiveness of using AIM shares to mitigate IHT might have a damaging effect on their share price, given that investing in them for IHT reasons is popular and a strong pillar of support for (many) AIM shares.

[Parky]

The 107 page report itself is here:


https://www.gov.uk/government/publicati ... of-the-tax

Don't be put off by the length of the report. The summary is "only" the first 14 pages and contains a number of interesting and useful recommendations, particularly about the rules about lifetime gifts, often discussed here.


Whether anything will happen as a result of this report is doubtful of course, as Phillip Hammond's probable imminent departure may result in the report being consigned to the dusty archives.

[PinkDalek]

If CGT were no longer to be rebased upon death for qualifying AIM shares, then wouldn't investors simply "Bed and ISA" their AIM holdings? Whereupon CGT won't apply anyway? Or better yet, buy them for an ISA in the first place, which is what I have mostly done.

Me too on the latter but Luthrin does hint towards something on the ISA front and I've yet to read the full report to see if it mentions ISAs at all.

My worry would be more what the article suggests. Anything that reduces the attractiveness of using AIM shares to mitigate IHT might have a damaging effect on their share price, given that investing in them for IHT reasons is popular and a strong pillar of support for (many) AIM shares.

Yes but again, I don't think Luthrin's comments are such to suggest that BPR would be abolished for qualifying unquoted shares or more specifically those that presently qualify on AIM etc, despite the OTS's apparent disapproval.


Other comments on the summary page may be worth a read, including:

Lifetime gifts

There are several exemptions from Inheritance Tax relating to lifetime gifts, which haven’t changed since the 1980s. ...

We recommend replacing the multiplicity of lifetime gift exemptions with a single personal gift allowance, to be set at a sensible level, and incorporating an increased lower threshold for small gifts. The exemption for regular gifts should be reformed or replaced with a higher personal gift allowance.

We recommend that the 7-year period be shortened to 5 years ...

[supremetwo]

The exemption for regular gifts should be reformed or replaced with a higher personal gift allowance.
https://www.gov.uk/government/publicati ... of-the-tax

Looks like more taxation to me unless the personal gift allowance is raised substantially - a factor of at least 3 since that they say it has not been raised since the 1980s.
I took 1985 as a start year for the inflation.

[JohnB]

Does the proposed removal of the CGT uplift mean the inheritor will not only have to value the item at point of death, but also need to know its original purchase price. I can see the record-keeping for that being very difficult. I'm not reallt sure what a "historic base cost" is

While I'd like the gilts morass to be simplified, I worry that the annual allowance won't be raised, so it will be a tax raising measure.

[PinkDalek]

If CGT were no longer to be rebased upon death for qualifying AIM shares, then wouldn't investors simply "Bed and ISA" their AIM holdings? Whereupon CGT won't apply anyway? Or better yet, buy them for an ISA in the first place, which is what I have mostly done.

Me too on the latter but Luthrin does hint towards something on the ISA front and I've yet to read the full report to see if it mentions ISAs at all.

I've now looked - the OTS commences the talk on Business property relief (and those AIM shares that qualify for BPR - not all as we know) at page 45, although the wording I've underlined looks to be a mistake. Business property relief ... 5.5 The property qualifying for relief is: ... unquoted shares in a company (including shares trades on AIM) (100% relief) and later at 5.16 they state In addition, since 2013, AIM shares can be held in individual savings accounts (ISAs), which means AIM shares held in such ISAs can also benefit from BPR, unlike ISAs that include shares traded on other markets.

Luthrin's comments were This would also undermine the very generous changes to the tax treatment of ISAs in estate administration which came into effect from 6 April 2018. Those changes concerned personal representatives and beneficiaries not facing Income Tax or CGT on investments retained in an ISA during the administration period or, if longer, three years after the death and also the additional permitted subscriptions. I haven't spotted anything on that in the OTS review but I may well have missed it and nor do I really understand the issue, as it is not an area I've ever studied.

[PinkDalek]

Does the proposed removal of the CGT uplift mean the inheritor will not only have to value the item at point of death, but also need to know its original purchase price. I can see the record-keeping for that being very difficult. I'm not reallt sure what a "historic base cost" is.

Yes, that does appear to be what is suggested but it only relates to Where a relief or exemption from Inheritance Tax applies. Despite them saying that reviewing gifts over the previous 7 years (sometimes 14 years) is too cumbersome, they then appear to suggest that Executors/beneficiaries will need to establish applicable base costs for all relevant chargeable assets (or March 1982 rebasing where relevant). Many will already have these records although they are not always easy to find, when the taxpayer concerned is no longer around. This Simplification of IHT record keeping could have the reverse effect for CGT.

[PinkDalek]

Looks like more taxation to me unless the personal gift allowance is raised substantially - a factor of at least 3 since that they say it has not been raised since the 1980s.
I took 1985 as a start year for the inflation.

See page 19:

Annual gift exemption £3,000

Limit in 2019-20 if increased to reflect inflation £11,900

https://assets.publishing.service.gov.u ... b_copy.pdf

[XFool]

Luthrin, over at Stockopedia, has today summarised the Office of Tax Simplification's second report.

This has got to be some kind of April Fools' joke, surely?

Ah. Purely about IHT. Guess I ought to take a look then. Oh God! Maybe tomorrow...

[scrumpyjack]

If the aim of BPR is to prevent forced sales of shares to be made which might damage a business, they could reasonably limit relief on AIM shares to cases where the holding was over 3% or 5%, say, of the issued capital. The sale of a holding below that may be felt to be unlikely to damage the business.

Another approach might be for BPR to be amended so that the IHT would be payable but could optionally be paid for in the shares of the business at their probate valuation. HMG could then retain those shares indefinitely. This would achieve the objective of preventing a forced sale of the business without unfairly favouring business assets over other assets for IHT.

[Bouleversee]

[quote="PinkDalek"]Luthrin, over at Stockopedia, has today summarised the Office of Tax Simplification's second report.

https://www.stockopedia.com/content/sma ... omment=5#5

I've yet to study the detail but the post (short extract only) includes this, quoting from the report:

“Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.” and then read on for the potential implications.

The 107 page report itself is here:

Policy paper
OTS Inheritance Tax review: Simplifying the design of the tax
This second report makes recommendations to make substantive aspects of the design of Inheritance Tax simpler, more intuitive and easier to operate.

https://www.gov.uk/government/publicati ... of-the-tax


If you have any comments, please concentrate on the practical implications, as against talk about whether or not IHT or CGT is good or bad etc.[/quote


What were "the very generous changes to the tax treatment of ISAs in estate administration which came into effect from 6 April 2018" mentioned in the link?

[Bouleversee]

Ah, I see PD has provided the answer in a later post: it was the removal of tax on dividends and gains accruing to shares held in an ISA during the administration period of an estate, unfortunately too late to benefit me as my husband died in Nov. 2016 and I had to pay tax on dividends, which seemed wrong to me.

[Bouleversee]

if Business Property Relief continues to shelter some of an Estate's assets from IHT, then the fact that beneficiaries may not get a uplifted CGT base cost on death is something manageable given the current CGT rates, CGT reliefs and exemptions etc. Beneficiaries would not generally be forced into a disposal and could plan accordingly.

If CGT were no longer to be rebased upon death for qualifying AIM shares, then wouldn't investors simply "Bed and ISA" their AIM holdings? Whereupon CGT won't apply anyway? Or better yet, buy them for an ISA in the first place, which is what I have mostly done.

My worry would be more what the article suggests. Anything that reduces the attractiveness of using AIM shares to mitigate IHT might have a damaging effect on their share price, given that investing in them for IHT reasons is popular and a strong pillar of support for (many) AIM shares.

PD - I don't agree that that would be all that manageable. It could amount to a lot of money if one has held shares for a very long time and would in effect amount to double taxation.

Lootman -

I don't follow your first point. If one has held a company's shares for a very long time and had a massive gain, bed-and-isa would incur cgt on any gain above the annual allowance.

I agree with your second point, though.

I have come to the conclusion that there is no point in buying more AIM shares when this is under review, especially as It seems a lot easier to lose money with them than make it and many pay little or no dividends and take a long time to become profitable and increase in value. Holding in an ISA would only benefit in cases of takeover or sale at a profit before death but if the suggestion of a tax on recipients rather than IHT comes into force there could still be a lot of tax to pay if there is no spouse left to inherit and benefit from the additional ISA allowance, which is only delaying the inevitable, as I am now finding.

Is it likely that the lifetime allowance for recipients would exclude gifts already made and continue to be subject to the 7 (or 5?) year rule, subject to taper, or would they be included, perish the thought? And what would happen if gifts had previously been made not by the person dying after the law changed but by their deceased spouse or by another relative; how far would they go back? Some simplification!

As others have said, I suspect we will all end up paying more tax and they will either rush through more unfair nonsense or we will be waiting a long time for changes. The simplest/quickest change for starters would be to index all the previous allowances and take their time over the more complex issues.

[Bouleversee]

Looks like more taxation to me unless the personal gift allowance is raised substantially - a factor of at least 3 since that they say it has not been raised since the 1980s.
I took 1985 as a start year for the inflation.

See page 19:

Annual gift exemption £3,000

Limit in 2019-20 if increased to reflect inflation £11,900

https://assets.publishing.service.gov.u ... b_copy.pdf

I think school fees have gone up a lot more than that.