Chancellor calls for review of inheritance tax

The Treasury is calling for a review of inheritance tax (IHT), stating that it is too complicated and needs simplification for the 3% of estates affected

The Office of Tax Simplification has already highlighted IHT as an area ripe for an overhaul and now the Chancellor, Philip Hammond, has asked the body to conduct a system-wide review of the current tax regime, and wants to see proposals for simplification, ‘to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible’.

The review will include a focus on the technical and administrative issues within IHT, such as the process of submitting returns and paying any tax due, as well as practical issues around routine estate planning and disclosure.

It could also look at how current gifts rules interact with the wider IHT system, following the outcry about taxation of donations to the recent Brexit referendum campaign which falls under IHT, although donations to regular election campaigns are exempt.

One of the aims is to address the way the current IHT rules affect tax planning surrounding transfers, investments and other relevant transaction.

There has been criticism in recent years over the increasing complexity of inheritance tax and the introduction of the nil rate band from 2017-18 has also created confusion for taxpayers.

By 2020, the nil rate band will give a married couple or civil partner couple a £1m tax free IHT allowance, and single taxpayers would have a £500,000 allowance, which benefits direct descendants when they inherit. It will increase in line with CPI from 2021-22 onwards.

The increased IHT allowance of £100,000 per person is a top-up to the existing £325,000 tax free IHT allowance, and equivalent £650,000 allowance for married couples and civil partners.

Anthony Nixon, partner and inheritance tax expert at Irwin Mitchell Private Wealth welcomed the announcement of a review of IHT. He said: ‘It is good to see the Chancellor of the Exchequer taking an interest in simplifying inheritance tax (IHT), which is well overdue.

‘Reform (perhaps complete abolition) of the ridiculously complex new IHT allowance linked to the value of one’s home, known as the residence nil rate band (RNRB).  Put plainly, it discriminates against those who do not own their own home, those who do not have children, and those who not married.

‘The current £325,000 allowance, which has been fixed since 2010, could then be raised for everyone.’

Inheritance tax is currently paid by around 3.4% of UK estates and raised around £4.7bn in 2015-16, an increase of 22% compared to 2014-15, according to the latest ONS IHT figures.

Equally the government has kept a keen eye on the use of trusts for tax planning purposes.

On trusts, Nixon said the OTS review should take 'a fresh look at the IHT rules for trusts, where the opportunity for reform was missed by HMRC in a recent review. It should be easier for those worried about their own improvidence to be able to create a trust for their own benefit, without tax penalties.'

Last August, HMRC was forced to issue revised guidance HMRC on how downsizing, selling or gifting a home affects the additional inheritance tax (IHT) threshold for residence nil rate band (RNRB) relief, after admitting that the rules were ‘complicated’.

The OTS terms of reference will be set in the coming weeks.

Report by Sara White

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