Last week I questioned how the Office of Tax Simplification on Inheritance Tax could recommend the part removal of a Capital Gains Tax exemption.
There is no clear stated policy as to how the tax should be amended and why other than to make it simpler. However, in 1984, when Inheritance Tax was introduced, the policy was to encourage lifetime giving.
Reading between the lines – is not the real policy of the report to increase the tax take? Inheritance Tax affects only 5% of deaths a year and raises a measly £4.38 billion is not the policy to raise more tax?
The most important exemptions in inheritance tax as the report points out, are:-
1. Gifts which fall within the nil-rate band of £325,000
This takes a whopping 64% of ‘transfers of value’ made within seven years of death or on death out of the charge to tax despite the fact that this threshold has been frozen since 6th April 2009. At today’s value the threshold would be £423,000
2. Small gifts of £250 per person
This is an exemption per recipient and has not been changed since 1980. In today’s value this would be £1,010. It is now almost impossible for executors to track small gifts from bank account records and presumably HMRC time and resources are expended to do so, at low margins?
3. Annual Gifts of £3,000
This is also difficult for Executors to track from bank accounts of the deceased, since Deeds of Gift are rarely drawn up. This exemption catches gifts over £250 but which cumulatively do not exceed £3,000. For example, 6 gifts or £500 one to each grandchild in a specific year. Again, the threshold of this exemption has not moved since 1981. In today’s money this exemption would be £11,900
4. Gifts in consideration of marriage or civil partnership
The threshold of these gifts has been frozen since Capital Transfer Tax, the tax before Inheritance tax, was introduced in 1975. It is still £5,000 for gifts made by parents, £2,500 from a grandparent and £1,000 from anyone else.
5. Regular gifts out or income
This threshold is unlimited– see below
6. Gifts to political parties
Unlimited and no comment made in the report – read into that what you like
7. Gifts to Charities
Unlimited and no comment made in the report
8. Gifts for the maintenance of a spouse or children under 18.
Again unlimited – more about this below
9. Gifts to a spouse or civil partner
Unlimited if the spouse is UK domiciled
(Plus three more exemptions which I have left out)
The Office of Tax Simplification makes a number of general comments about the confusion and complexity, as supported by quotes from one or two of the small number of respondents (less than 3,000) which the OTS received from what it admitted was not ‘a representative sample of society’. Hmmm.
For all its simplification rhetoric the OTS seems very focussed on the unlimited exemptions, in particular the regular gifts out of ‘normal’ income and gifts for maintenance.
It noted that there was no definition of ‘normal’ expenditure. True, but this exemption has been in operation for some 35 years without much concern. It goes on to say that ‘normal’ could also vary ‘widely over time and from person to person’. True but, then the exemption was to encourage lifetime gifts, rather than what I now appears to be evident - to increase revenue regardless of the impact on the taxpayer.
The OTS recommends that changes be made to this exemption, either a percentage of annual income, or the annual gift allowance should be increased to absorb the normal expenditure out of income. If it turns out to be the later, this will greatly curtail the scope of giving by the very wealthy into trust during their lifetime – but more about this next week.
The OTS also focussed on the plethora of small exemptions; gifts in consideration of marriage and annual gifts. It recommended that these should be merged into a simple annual allowance which would include the gifts for maintenance of a spouse or child under 18. Fine – but why then remove the hold-over of the surplus of annual exemption to the next year, if not to raise tax?
When inheritance tax was about encouraging lifetime gifts a hold-over made sense. But not if the main driver is to increase tax?
With regard to small gifts, the OTS recommends that the threshold should be increased to £1,000 per gift. If the main driver is to increase revenue it must also be the case that it must keep its costs down. It should not therefore waste time and resources chasing small gifts of £250 and on gifts below the annual £3,000 limit.
The only positive element in the report is that the exemption for gifts made more than seven years of death should be increased to all gifts made more than 5 years before death. Again, not stated directly it is clear that following changes in the data protection rules personal data cannot be kept for more than six years so the executors cannot be expected to disclose details of gifts when records are no longer available?
Call me a cynic, by all means – for thinking that the main thrust of the report is to raise revenue and not to simply it, but I would be interested in your views, whether you agree or not.
In the meantime, if you would like to discuss your tax and succession concerns with Caroline, please call 0203 740 7422 or write to firstname.lastname@example.org