Irwin Mitchell | Tax Law under the microscope from the OTS and the Staveley judgment

Changes to the two main capital taxes - Capital Gains Tax (CGT) and Inheritance Tax (IHT) are likely in the Autumn Budget 2020, as the Chancellor looks for “fair” ways to tax people and raise more tax after the huge cost of meeting the emergency COVID-19 measures.

CGT is under review by the Office of Tax Simplification (OTS) - a review which started in mid-July and runs until October, but with a preliminary review which includes the interaction with IHT on death being submitted to the Chancellor before the Budget.

The OTS has a formal brief which goes with its name, to look for ways to simplify the tax system, through a simplified tax law and administration. However, it seems that after the major policy changes they recommended in their July 2019 report on IHT, the OTS are also being encouraged by the Chancellor to look at policy change in a big way with CGT. These two taxes come together in the way that capital gains are effectively “wiped out” on death, by a “CGT uplift” (as it is often called), with assets treated as acquired by the executors of an estate at the “probate value” at the date of death.

The rationale is that you’re liable to IHT on death, so shouldn’t pay CGT as well, which makes sense when an estate does actually pay IHT. It’s more questionable, at least to some, when there’s no tax to pay, especially where there’s a full exemption or relief from IHT. This means both the spouse exemption and the agricultural and business assets that qualify for 100% Agricultural Property Relief (APR) and Business Property Relief (BPR).

For spouses, the OTS recommended last July that the surviving spouse should take on assets at the original “base cost” of their deceased spouse. This may present significant practical problems where records of the original purchase and improvement expenditure on property (or with investments – all the changes to holdings, and extra expense like rights issues), sometimes going back many years, need to be found. Any change may be combined with some form of rebasing for CGT, as the last one was 38 years ago in 1982, so for some assets you need to look back a long time for cost details! If this change does come in, many clients will need to rethink their Wills and tax planning. In the meantime it makes sense to keep Wills and trusts flexible, with trustees guided by good, up to date letters of wishes.

For businesses and farms, the potential loss of CGT “uplift” on death is potentially even more significant. For many years farm and business owners have proceeded on the assumption that they would have a form of “double relief” (as the OTS call it) on death, which has encouraged some to retain their full ownership until their death. It does mean that many children or family working hard in the business for limited returns may rely on assurances that they’ll eventually be left the assets. This leads to many cases of proprietary estoppel, especially with farms, where family claim they were promised the farm (“one day all this will be yours!”) and have relied on that promise.

If the “double benefit” may go, and CGT uplift might be withdrawn as the OTS have suggested, it reduces the tax incentive to hold on to everything until death. Making lifetime gifts of shares in a farm or business thus becomes a real option for clients to consider. It’s at least worth professional advisers bringing this possible change to the attention of clients. The 100% relief for IHT can still be claimed, and the capital gain might be held over to save actually paying CGT now, subject of course to a lot of detailed advice - including clawback provisions. It may be worth considering a gift to a trust.

Another tax change recommended by the OTS, which may be considered for the budget, is the “trading threshold” of at least 50% to secure 100% BPR. The OTS proposed that the threshold be raised to at least 80%, to bring it into line with some CGT provisions, even though those operate in a rather different way. If a business had rather too high a level of “investment” income and capital value, and might thus be at risk of losing the 100% BPR if this change were made, it would be another reason to make a lifetime gift. Bank the 100% relief while you can, while the business still qualifies, rather than face the risk of losing the relief entirely. These are difficult issues for clients to consider, requiring advice with experienced expertise.

Staveley case

The Supreme Court judgement for this case is really important for IHT and pensions planning. It’s one of those controversial cases where a 3-2 majority overturned, but only in part, a 2-1 majority of the Court of Appeal. We’ll no doubt return to this before long, but two initial thoughts:- (1) there’s great relief that the transfer by Mrs Staveley from a pension scheme to a personal pension plan (PPP), to enable her sons to benefit rather than her ex-husband, wasn't caught for IHT, as that had caused great concern.

(2) We're digesting the wider implications, of what it says about both s.10 IHTA 1984 - no intention to confer a gratuitous benefit – the key to (1) above; and also s.3 (3) omission to exercise rights, which was the second point on which HMRC won, as the Supreme Court considered that failing to draw a pension from her PPP was such an omission and was caught for IHT. While there has been legislation on this point, since Staveley was heard, this may have wider significance.

Published: August 2020

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Tax Law under the microscope from the OTS and the Staveley judgment

August 2020

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Tax Law under the microscope from the OTS and the Staveley judgment

August 2020

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