Inheritance Tax - What could the OTS review change?

The review of Inheritance Tax by the Office of Tax Simplification.

In early 2018, the Office of Tax Simplification ("OTS") received a mandate from the Chancellor to carry out a review of Inheritance Tax ("IHT").  Philip Hammond requested proposals for "simplification, to ensure that the system is fit for purpose".  We explore the potential implications of what may in fact transpire to be a fairly wide-ranging review.

A public call for evidence was issued by the OTS with a deadline for responses of 8 June 2018.  IHT is one of the primary capital taxes, and the associated legislation and administration affects many of our clients.  Wrigleys Solicitors LLP has submitted a response to the call for evidence, and we now await (albeit with some slight trepidation) the report due in the Autumn.

It is said that the results of the review are awaited slightly nervously.  We certainly recognise that there are key areas of the IHT reporting regime which are ripe for reform; for example, aligning the deadline for payment of IHT on death with the deadline for submission of the IHT return to HMRC, which currently seems a strange anomaly.  However, if certain areas of the legislation are amended in the manner which may be implied from the OTS's call for evidence document, this could have a significant impact on succession and IHT mitigation planning generally.

The OTS is specifically reviewing the nature of agricultural property relief ("APR") and business property relief ("BPR").  These are two very valuable reliefs from IHT which potentially enable assets meeting the relevant criteria to be transferred completely free of IHT during lifetime or on death.  These reliefs were introduced for valid policy reasons, which are still very much relevant today.  In summary, that is to allow businesses (farming and other) to be passed on to the next generation intact and without needing to be sold to fund an IHT bill, with all the knock-on effects that would have on the wider economy.

We hope that these reliefs will remain, but are concerned that changes may be proposed in the OTS's report due in the Autumn, which could even precipitate legislative changes to be announced as early as the next Budget.

Whilst the ultimate outcome of the OTS's IHT review, and the Government's response to that, is far from predictable, there is certainly a good argument to "make hay while the sun shines", and put into action any IHT planning involving business and/or agricultural assets now.  That is to say, to engage in this whilst APR and BPR are available in the current legislative form and in the context of what might be said to be a relatively benign capital taxation regime generally. 

For example, transferring let farmland into a trust now, or gifting outright, and benefitting from 100% APR to eliminate the IHT otherwise due in so far as possible, in case that relief is curbed in the future perhaps by virtue of such land being let rather than farmed in-hand. (That is one of the themes of questions in the OTS's call for evidence document).  Another might be to trigger an IHT charge on an existing composite business structure already in place.  These may have been set up with the case HMRC v Brander (Executor of 4^th Earl of Balfour in mind, and with a view to claiming 100% BPR on the next IHT event.  Triggering that now would ensure HMRC considers the potential IHT liability under the current rules rather than any future amended rules, as the case may be.

All in all, there is a strong case to be made for acting sooner rather than later when it comes to IHT planning involving business and agricultural assets in particular, for fear that these valuable reliefs may be adversely affected by what was perhaps initially meant to be a review of IHT confined to the realms of administration only, and not substance.