The Office of Tax Simplification (OTS) have published a report containing proposed changes relating to Inheritance Tax (IHT). The Government will decide which of these rules will become law.
What has been proposed for business?
Currently if a business is regarded as trading for IHT purposes then Business Property Relief (BPR) will apply and no IHT will be due on the value of the business. BPR is available if a company is regarded as ‘wholly or mainly’ trading, by more than 50% (looking at business activities as a whole). This test is far more generous than the test for trading status on a capital gains tax transaction, where a company may have no more than 20% of its activities as investments. The proposal is to align the test for BPR with CGT reliefs.
The concern would be that many mixed businesses would struggle to attain valuable BPR relief, impacting the ability to pass a business down to the next generation free of a tax burden. Mixed businesses, such as property companies who redevelop property and retain old stock which has not been sold and currently let, could fail to meet the 80% trading test.
Further alignment of the rules is suggested as OTS have stated that the CGT uplift that occurs on death if an asset is covered by an IHT relief should be removed. The uplift occurs as the assets will pass to the next generation at probate value, washing out any capital gain on the asset that was made during the deceased’s lifetime.
What has been proposed for Limited Liability Partnerships?
Proposals to review the IHT treatment of Limited Liability Partnerships (LLP) for the purposes of BPR trading requirements has also been suggested. Use of LLP structures, particularly surrounding the property business, have increased in recent years and careful consideration will need to be had for long term structuring of these businesses.
What has been proposed for ‘gifts’?
When a gift is made during an individual’s lifetime it is usually made to a connected person, which means capital gains tax can be due as the asset is deemed to pass across at market value with the donor assessed to tax as if the actual market value proceeds had been received, regardless of whether any money changed hands. The IHT position is different and the gift of an asset would be a PET (Potentially Exempt Transfer) which is subject to a claw back of IHT if the donor does not survive seven years or more after making the gift.
The proposal in this area is to consider simplifying lifetime gifting and creating an annual allowance. In addition, the seven-year period required before gifts are exempt from IHT would potentially be reduced to five. Taper relief which is currently available on the seven year period would also be abolished.
Succession planning will need further thought as the Government continues to redefine the tax landscape.
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