The UK has arguably one of the most generous Inheritance Tax (IHT) regimes in the world. Generally, the current Potentially Exempt Transfer (PET) regime enables wealth to be passed down the generations by way of lifetime gift without the beneficiary paying any Inheritance Tax (IHT) provided the donor survives the gift by seven years. This is a very general summary of the PET regime, and in cases where there have been multiple gifts and transfers into Trust, the position is much more complex. Because of the apparent generosity of this regime, there have been calls to have it reformed and in January of this year, the Chancellor wrote to the Office of Tax Simplification to undertake a review of the Inheritance Tax Regime.
Inheritance Tax generated just over £5bn in tax receipts in the 2017/18 tax year which has increased by over 50% since 2014. Not withstanding this however, Inheritance Tax still only accounts for less than 1% of every pound of taxation raised and an incredibly low 4% of deceased estates pay any Inheritance Tax. It is often said that Inheritance Tax is only “paid by those who dislike their relatives more than the Taxman”, hence highlighting the ease at which this tax can be legally avoided.
A review is therefore underway and on 30 April 2018, the Office of Tax Simplification issued a consultation document requesting evidence across a range of Inheritance Tax matters and in particular, the current lifetime gift or ‘PET’ regime. In the UK in the 2018/19 tax year, a deceased’s estate is taxed at a rate of 40% above the tax free band of £325k. With the addition of the residence nil rate band this could rise to £900k for couples who are married or are in Civil Partnerships. A generous aspect of the UK IHT system is the fact that unlimited lifetime gifts can be made to individuals and have the potential to be tax free. If the UK IHT system is reformed, the reform could effectively herald the abolition of Inheritance Tax with it being replaced by tax levied on the donee, similar to the system that prevails in the Republic of Ireland – Capital Acquisitions Tax. In the Republic of Ireland, each individual has a lifetime gift receipt threshold of €310k in relation to gifts received from both parents. There are other significantly lower limits for gifts received from siblings and relatives or from third party strangers. Any receipts above these limits are taxed at 33%. Gifts received on death are effectively Inheritances and are taxed in the same way at the 33% Capital Acquisitions Tax rate. It is believed that a similar system is being proposed for the UK with perhaps a banded CAT system with tax starting at 20% and rising to 30% on lifetime receipts above £500k.
Another radical proposal is that Capital Gains Tax will be charged at death on the difference between the market value of chargeable assets belonging to the deceased, less their original base cost. At present in the UK, there is no Capital Gains Tax levied at death and in fact, the beneficiary receives the asset from the deceased estate at its market value at the date of death, thus providing, in many cases, a significantly higher base cost for future disposals.
With all these potential changes to the current generous Inheritance Tax and Capital Gains Tax regimes, anyone contemplating lifetime gifting, should perhaps accelerate their intentions in case the IHT and CGT regimes are radically changed in this year’s budget in November 2018. Care should be exercised when embarking upon a strategy of lifetime gifting to children as gifts can trigger Capital Gains Tax liabilities and once given away, the asset is the property of the child and therefore, becomes fair game for creditors in adverse lifetime events such as Bankruptcy, divorce etc. Life insurance should also be considered when making PETs and there are specific policies that can be purchased which take into account the decreasing value of the PET over the seven year waiting period.
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