Rural Law

Changes to the tax system seem never to be far away; indeed, staying abreast of all the different regimes keeps many lawyers, accountants and financial advisers in full time employment!

However, it seems it is not just property lawyers like me who find the tax system too complicated – so too do the government and tax authorities! Enter: the Office of Tax Simplification (OTS) – a UK Government Agency which has existed since 2010 but been given a more permanent statutory footing since 2016. The stated objective of the OTS is reducing the tax compliance burden on taxpayers.

The most recent report from the OTS is the first of a two-stage review looking at the Inheritance Tax (IHT) system and how its complexities might be simplified.

This first report deals mainly with the administrative side of things. Of wider interest is likely to be the second report, which is scheduled to be published in spring, and is due to deal more with matters of substance.

The first report commits the OTS to look at various issues in more detail and hints at what the second report might contain; of particular interest to the rural sector are likely to be the following (comment kindly donated by my colleague Alan Eccles, whose full blog on the first report can be found here):

The “residence” nil rate band.  In particular its apparent undue complexity and its limit to ‘lineal descendants’ meaning there will be numbers of families unable to take advantage of it or chosen beneficiaries do not fall into the category of ‘lineal descendants’.  For example, siblings are not lineal descendants.

Lifetime gifts.  This has attracted media attention in recent time.  The OTS has identified issues such as complex exemptions, the level of exemptions have not kept pace with inflation and record-keeping can be difficult. The first report also flags up issues with liability for the payment of tax on ‘failed’ gifts and similar matters which might have unintended consequences for the deceased’s chosen beneficiaries.  The first report briefly touches on the perceived ability of ‘wealthier’ individuals to pass on wealth during life and that the figures for (taxable) estates do not take account of gifts made earlier than seven years before death.

Businesses and farms.  These can attract valuable IHT reliefs.  The OTS makes interesting statements here.  It states that it has received comments “which raised some quite broad questions”.  It also said that “evidence gathered so far suggests the reliefs are broadly working in a straightforward way.”  The report notes that “the OTS’ focus will be on the practical application and complexity of these reliefs rather than major changes to the reliefs themselves.”  The OTS says that it recognises that certain types of business asset are treated more favourably than other assets.  On these matters the report appears to conclude that it is for government, should it so choose, to make changes to these reliefs, but that topics such as how Business Property Relief and Agricultural Property Relief fit into the wider tax framework will feature in the second report.

Trusts. Trusts feature fairly lightly in the first report.  The OTS suggests that the perception that ‘wealthy’ individuals put assets in trust to avoid IHT is inaccurate and does not take account of trust taxation changes in 2006.  The utility of trusts as a protective and prudent legal environment and not about tax featured in the introduction to the Government’s current review of the taxation of trusts (on which we have blogged). The second report will consider apparent complexities attached to insurance and other products held in trust.

We will have more on the second report once it has been published. In the meantime, if you would like any advice on IHT or succession planning more generally, please get in touch.

Fiona Scott

Senior Associate at Brodies LLP
Fiona is a Senior Associate in the Land and Rural Business team in Edinburgh. She acts in and provides advice on the full spectrum of rural property matters, principally from the perspective of large landowner clients. She has particular expertise in regulation of the private rented sector .
Fiona Scott