Neil Jones: Sibling rivalry – maybe not for IHT

Neil Jones looks at the latest IHT development - updates to the rules concerning gifts between siblings - and asks if this is a taste of things to come...

Inheritance tax (IHT) has always been an emotive subject and the tax system is notorious for being reactive rather than proactive.

We have seen it extended in recent years to cover civil partners as well as married couples and furthermore at the end of 2019 when opposite-sex civil partnerships were introduced. We are only a few weeks into the new year and we’ve now seen a proposed exemption for siblings which has crept under many people’s radars.

At the time of writing this legislation is going through the motions at the House of Commons and the House of Lords under the rather catchy title of the ‘Inheritance Tax Act 1984 (Amendment)(Siblings) Bill’.

This amendment, if passed, will allow, in certain circumstances, for a person to make exempt transfers to a sibling. Such transfers have been the subject of appeals in the past.

I can recall that in 2008 there was a case that went to the European Court of Human Rights where two co-habiting sisters challenged HM Revenue & Customs’ decision not to allow them the same tax protection afforded to married couples and civil partners. These sisters had co-habited for many years and were both over 80 years of age, but lost the case and a large tax liability remained.

Proposals

The proposal is that a transfer between siblings will be exempt if certain conditions are met. Firstly, the sibling making the gift needs to be over the age of 30 at the time they make the gift and both siblings need to have lived together in the same household for the seven years preceding the transfer – the legislation uses the terminology ‘ordinarily resided’ but this is not defined.

For the purpose of this amendment, a sibling is a brother, sister, half-brother or half-sister.

This will provide a valuable benefit to those siblings who live together and while some, albeit very few, will have lived together for a prolonged period of time, it is not unusual to elderly siblings to co-habit later in life.

This exemption could, therefore, provide valuable benefits for some – sadly too late for the Burden sisters but there will still be some who will benefit and this could be a factor for widows or widowers who want company or where one may need some care and relies on a family member.

There was talk of IHT reforms before the general election but the fact that this legislation uses a seven-year time period seems to make it consistent with the seven-year clock associated with IHT.

Is this a hint that opportunity and desire for reform has faded now the government has a five-year mandate? We will have to wait until March to get the answer to that question, but in the meantime, this amendment is a positive step in the right direction and hopefully points to further change around the corner.

Neil Jones is tax and estate planning specialist at Canada Life