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12 July 2019 0 Comments
Posted in Opinion, Private Client

Death and taxes: plans that impact the transfer of wealth

Posted by , Partner

This article first appeared in The Times on 11 July 2019.

Benjamin Franklin’s reference to the “two certainties: death and taxes” is frequently quoted — and inheritance tax has combined the two in pretty much the same form since 1984.

But in January last year Philip Hammond, the chancellor, asked the Office of Tax Simplification to review both the administration and technical aspects of the tax. The second of their reports has just been released.

It is detailed and involved consultation with representative bodies and interested parties across the political spectrum over a long period. Labour’s report on land ownership, released last month, also looked at inheritance tax and land and made suggestions that are considered in the OTS report.

Further detail on Labour’s plans have been released piecemeal, but essentially amount to replacing inheritance tax with a lifetime gift tax similar to those applied in many other parts of the world. That tax would be calculated not by reference to the wealth of the donor — as is the case in the UK — but rather according to the amount received.

Labour’s plans, which are the subject of further review, appear to involve a lifetime tax on all gifts by parents to their children in excess of a lifetime allowance of £125,00 per recipient, with gifts over that amount treated as income in the hands of the child and so taxed as a top slice of income.

The United States has a similar lifetime allowance but at a rather higher level — some $11.4 million at present.

Labour estimates that it will triple the yearly take under inheritance tax from £5.4 billion to about £15 billion in 2020-21.

The proposals will involve a substantial increase in the number of people affected by inheritance tax, as well as the levels of tax to be paid, and will create particular problems surrounding gifts of family homes. With the average national house price standing at more than £230,000 — and £480,000 in London — many people who do not consider themselves wealthy will be caught up in the new tax.

This contrasts with existing government policy, which has pushed towards an allowance on death of up to £1 million for the transfer of a home to a child.

Anyone considering a gift of land or cash would be well advised to prepare to make it before any potential change of government, but even under the government report there are changes that will wholly alter common arrangements for transfer of wealth.

Recommendations include the shortening of the seven-year gift requirement to five but without any taper in tax rate; removal of the automatic uplift on death for capital gains tax purposes when no inheritance tax is payable; implification of the rules surrounding life policies and pension death benefits; and  implification of the rules surrounding farms, businesses and furnished holiday lets.

For a tax that is paid at present by only 5 per cent of those dying each year, changes are afoot.

If you have any enquiries, please contact James McNeile on:

01225 730 235     Email usjames.mcneile@roydswithyking.com

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