Inheritance Tax – What Changes May Be Announced?

New rules may be announced in the forthcoming Budget on 11 March, following the Office of Tax Simplification (OTS) proposed changes around lifetime gifts.*  

• A Parliamentary Committee recommends scrapping most of the allowances for lifetime gifts and reducing the rate of inheritance tax from 40% to 10%. ¹
• A peer is sponsoring a Bill on behalf of cohabiting siblings to enjoy the same inheritance tax exemptions as married and civil partners.
• Increases in the residence nil rate band will start on 6 April. 

Lifetime Giving Proposals

The brief of the Office of Tax Simplification is to simplify tax, making it easier to understand and simpler to administer. Its proposals affect inheritance tax on lifetime gifts. OTS says the many different allowances for lifetime gifts, (See box) are confusing for the taxpayer and have not been uprated since the 1980s, so have lost their real value. It recommends replacing these with a single annual gift allowance, increasing with price rises.  If the annual allowance of £3,000 had been uprated by inflation it would now be £11,900 and the £250 small gifts exemption £1,010.
 

Current Tax-Exempt Lifetime Gifts

Type of lifetime gift	Exempt amount
Annual Exemption	£3,000 per year, carried forward for 1 year
Small gifts	£250 per recipient, no overall limit
Gifts on marriage/civil partnerships	£5,000 to child £2,500 to grandchild £1,000 to others
Out of surplus income	Unlimited but must be regular over two or more tax years.

Currently outright lifetime gifts above these allowances, fall out of the taxable estate after 7 years from the date of gift, with the taxable value of the gift reduced by 20% per year, after year 3. Instead it proposes a 5-year taxable period and no tapering of the value of the gift. While this shortens the time over which a gift remains in the estate, it does create a cliff edge, where death after 4 years 364 days would bear the whole 40% tax but death one day later resulted in no tax charge. 

For those with surplus income, regular gifts can be made from the surplus, which are exempt immediately, with no monetary limit. It has proved useful to the Bank of Mum and Dad providing regular support with mortgage or education costs.  The proposals include removing the regularity requirement and fixing it as a % of income or replacing it with a higher personal gift allowance. No figure is recommended but examples in the report refer to £25,000.

Gifts between partners

Gifts between spouses and civil partners are exempt from inheritance tax. There is no similar protection for cohabitants, outside of a civil partnership or marriage. This can lead to severe hardship for the survivor, with them being forced to sell or re-mortgage their home, while coping with bereavement. If fit and healthy, they may choose to fund the tax bill through life assurance, but this is a less affordable option for the elderly. The OTS propose to make all fixed term life policies exempt from inheritance tax, currently they must be placed in a trust to achieve that. 

One group of cohabitants who cannot resolve this difficulty through marriage or civil partnerships are cohabiting siblings. In the House of Lords, a Bill sponsored by Lord Lexden, is seeking to give them similar rights to inheritance tax exempt transfers of assets as married couples and civil partners.  House price inflation, outpacing wage growth, has seen an increase in siblings who club together to buy their first home. In later life, living together for support and companionship. The Bill seeks to recognise such relationships and provide exemption from inheritance tax, where the siblings are over age 30 and have cohabited for at least 7 years prior to death.  

Residence Nil Rate Band 

This allowance, currently at £150,000, enables those bequeathing their main residence to a direct descendent (child or grandchild) to claim an exempt amount in addition to the first £325,000. From 6 April it is £175,000 and then increases with inflation. Couples may inherit any remaining allowance from a deceased spouse or civil partner, so that after 6 April, a couple who own a home worth at least 2 x the residence nil rate band and leave it to a child or grandchild, may pass on £1 million before tax is payable. Those with estates in excess of £2.3 million (figure applies to a person with only one residence nil rate band available where death occurs in 2019/20) do not enjoy this exemption and for estates over £2 million a reduced allowance applies. 

                                            
*OTS Inheritance Tax Review: Simplifying the Design of the Tax July 2019 
¹ All Party Parliamentary Group Inheritance and Intergenerational Fairness February 2020         

Please remember, no news or research item is a recommendation or advice to buy. The contents of this blog are for information purposes only and do not constitute individual advice. A pension is a long-term investment. The fund value may fluctuate and can go down. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.  If you are unsure of the suitability of any investment or product for your circumstances, please contact an adviser. All information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation, are subject to change. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.                                                         

  Back To List