The Financial Secretary to the Treasury has written to the Office of Tax Simplification (OTS) to confirm that HM Treasury strongly supports some key recommendations on changes to Inheritance Tax.

The government announced on 23 March 2021 that it will:

• change reporting regulations so that from 1 January 2022 over 90 per cent of non-taxpaying estates each year will no longer have to complete Inheritance Tax forms for deaths when probate or confirmation is required; and 
• make permanent the ability for those dealing with a trust or estate to provide an Inheritance Tax return without requiring physical signatures from all others involved, easing the administration burden in cases where an Inheritance Tax return is still required. 

These new rules will result in dramatic changes in reporting regulations from 1 January 2022 for more than 200,000 estates every year.

It was also announced that the government will continue to work on the remaining recommendations made by the OTS: for digitisation, improving processes for lifetime and trust charges, guidance, and working with court services. Some of these are longer term in nature and will be taken forward as part of the wider Tax Administration strategy.

We wanted to remind our readers of the Inheritance Tax (IHT) implications of making cash gifts during the current tax 2020-21 tax year that ends on 5 April 2021.

You can give away up to £3,000 worth of gifts each tax year. This is known as your annual exemption. Any unused part of the annual exemption can be carried forward, but only for one year. So, if you didn’t make any cash gifts in 2019-20, you could gift up to £6,000 this tax year.

There are also generous exemptions for normal gifts made out of your income, but you must be able to maintain your standard of living after making the gift. There are also reliefs available for wedding or civil ceremony gifts. You can gift up to £1,000 per person with higher limits of £2,500 for a grandchild or great-grandchild, £5,000 for a child.

You can also give as many small gifts of up to £250 per person as you want during the tax year but only if you haven’t used another exemption on the same person.

There is no IHT to pay on lifetime gifts between you and your spouse or civil partner as long as you both live together, permanently in the UK.

Other gifts, outside these limits, count towards the value of your estate and should be carefully considered.

The Inheritance Tax main residence nil-rate band (RNRB) came into effect on 6 April 2017. The RNRB is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent, such as children or grandchildren, after their death. The RNRB is on top of the existing £325,000 Inheritance Tax nil-rate band (NRB) threshold.

The RNRB is being introduced in stages; it commenced at £100,000 in 2017-18, increased to £125,000 in 2018-19 and will increase to £150,000 in 2019-20 and £175,000 in 2020-21. Any unused portion of the RNRB can be transferred to a surviving spouse or partner in a similar way to the existing NRB. Taken together with the current Inheritance Tax threshold this means that by 2020-21, parents will be able to pass on property worth up to £1 million free of Inheritance Tax to their direct descendants.

However, there is a tapering of the RNRB for estates worth more than £2 million even when the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is valued at more than the £2 million taper threshold. Essentially, this means that no RNRB will be available for estates in 2018-19 that are worth more that £2.25million. Tapering can also reduce the amount of additional threshold available to transfer to a surviving spouse or civil partner even if no additional threshold is used on the first death.

The Disclosure of Tax Avoidance Schemes (DOTAS) legislation, targets taxpayers who implement listed tax avoidance schemes as well as the promoters of tax avoidance schemes. New regulations came into force on 1 April 2018 that extended the scope of the IHT hallmark to make it more comprehensive.

HMRC has been careful to listen to concerned practitioners to ensure the new hallmark is appropriately targeted to catch IHT avoidance schemes, but not the straightforward use of reliefs and exemptions or ordinary tax planning arrangements.

The new regulations add new descriptions of disclosable arrangements, which are designed to reduce the value of an estate on death or those which seek to avoid certain other IHT charges in addition to ‘entry charges’ on relevant property trusts.

The new hallmark also ensures that established retail products, which accord with established practice that HMRC has previously accepted, do not have to be disclosed if they were first made available and entered into before 1 April 2018.

Most gifts made during a person’s life are not subject to tax at the time of the gift. These lifetime transfers are known as ‘potentially exempt transfers’ or ‘PETs’. The gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The rules are different if the person making the gift retains some ‘enjoyment’ of the gift made. This is usually the case where the donor does not want to give up control over the assets concerned. These gifts fall under the heading of ‘Gifts With Reservation of Benefits rules’ or ‘GWROBs’. A common example is where an elderly person gifts their home to their children (who usually live elsewhere) and continues to live in the house rent-free.

There is an interesting exception to the GWROBs rules that occurs when there is a gift of an ‘undivided shares of land’. This can happen when for example an adult child moves in with a parent and the parent transfers the home into joint ownership (usually a 50:50 split). Where the two people jointly occupy the property and share the outgoings then HMRC will accept that this is not a GWROB. However, the relief is not straightforward and HMRC will carefully examine such arrangements to ensure that they meet the necessary requirements for relief.

Planning note

If you are contemplating any of the arrangements set out in this post please call to clarify that no adverse tax consequences will occur as a result.