Personal Law

A proposal has been put forward to change how inheritance tax applies to siblings in certain circumstances. As always, early estate planning should be carried out for the benefit of surviving relatives.

The existing regime

The existing inheritance tax regime does not provide any direct exemption or allowance in respect of assets passing to siblings on death.

This can be contrasted to the position of a deceased person who is survived by their spouse/civil partner and/or their children. Where a person is survived by their spouse/civil partner, generally assets passing to the surviving spouse/civil partner will be exempt from inheritance tax.

Moreover, if wills are prepared in a tax-efficient manner, as of 6 April 2020, it will be possible for the surviving spouse/civil partner to have an inheritance tax threshold of up to £1 million in certain circumstances.

The proposed reform

The proposal put forward by Lord Lexden in the House of Lords, would treat the transfer of property to a surviving sibling as exempt from inheritance tax subject to certain conditions.

Firstly, the siblings must have lived in the same property for a continuous period of seven years ending on the date of the first sibling’s death.

Secondly, the surviving sibling would need to be at least thirty years old.

The proposal also includes half-brothers and half-sisters.

This reform would attempt to avoid the surviving sibling being forced to sell their shared home to pay inheritance tax on the first sibling’s death.

Analysis

The proposal from Lord Lexden is very much in its early days and may not be taken forward. Nevertheless, it highlights the significant impact that an individual’s personal circumstances can have on their inheritance tax position.

This is not the first time that the perceived unfairness of the existing regime has been brought to light. In 2008, the Burden sisters unsuccessfully challenged the current regime in the European Court of Human Rights.

More recently, as part of the Office of Tax Simplification’s (OTS) second report from 2019, the OTS noted that this was a policy issue and commented that addressing this “could have a significant Exchequer cost”. In their report, the OTS also pointed out that it is possible to pay inheritance tax on houses in instalments with interest over a ten-year period.

Conclusion

Those who die without a spouse/civil partner and/or children currently have fewer exemptions and a reduced inheritance tax threshold.

As with all good estate planning, it is important to take advice at an early stage to consider what action could be taken to benefit your surviving relatives.

Fraser Mackay

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