The Office of Tax Simplification takes aim at Inheritance Tax
At the Chancellor’s request, the Office of Tax Simplification (‘OTS’) has launched a review of Inheritance Tax (‘IHT’). The review focuses on both process and administrative issues associated with IHT, as well as more technical areas including disclosure, estate planning and the plurality of available reliefs.
The OTS has confirmed that it is hoping for ‘genuine, substantive simplification’, as opposed to a ‘bonfire of taxpayer reliefs and exemptions’, however there are a number of areas where the law looks ripe for reform.
One area often singled out as being of particular complexity is the myriad of exemptions and reliefs from IHT. Such exemptions include the Potentially Exempt Transfer (‘PET’) regime, the spouse/civil partner exemption, the annual exemption and the exemptions for small gifts, gifts in consideration of marriage or civil partnership and gifts qualifying as normal expenditure out of income. There are also reliefs for some forms of business and agricultural property.
Each individual has a nil rate band (‘NRB’), at which assets are taxed at 0%. Transferrable between spouses, the NRB has remained fixed at £325,000 since 2009 and looked set to stay that way until at least 2021. The introduction of the residence nil rate band (‘RNRB’) has added another layer of complexity. This is an additional tax-free sum that can be claimed by estates where a ‘residence’ is ‘closely inherited’ by ‘lineal descendants’. A complex means of increasing the threshold at which assets can be passed free of IHT, the RNRB has been both poorly received (it discriminates against those without children or property) and under-utilised (only one in six estates have claimed the relief). It is ironic that, having been designed to reduce those caught by the IHT net as a result of rising property prices, IHT receipts hit a record high in 2017/18 of £5.2bn.
It is unsurprising then that this area is set for reform, however, the real question is how radical such reform will be. Individuals may see some of the more under-utilised exemptions removed (small gifts/gifts on marriage etc.), and the annual exemption increased. The government could make changes to the RNRB, by expanding the definition of ‘lineal descendants’ to include nieces/nephews. More radically, it could do away with the RNRB altogether, and simply increase the NRB.
The government could even scrap IHT entirely, and instead treat death as a ‘disposal’ for Capital Gains Tax purposes, or replace it with a form of gift tax, whereby the recipients of lifetime gifts or those who inherit assets are taxed rather than the estate of the deceased. Time will tell.
For more information, please contact the partner having responsibility for your affairs or any partner in the Private Client Department here.