In January 2018, Chancellor Philip Hammond ordered a comprehensive review of Inheritance Tax (IHT). The review is intended to let the general public and professional advisers have their say about whether or not the current Inheritance Tax system is fit for purpose.
Current IHT Rules and Issues
At present, the IHT threshold (the Nil Rate Band) is £325,000 for an individual. Any taxable estate above this level is taxed at 40% on death. Spouses are able to transfer their Nil Rate Band to one another giving them a potential threshold of £650,000.
Whilst properties and investments have increased in value over the past decade, the Nil Rate Band has remained the same since 2009/2010 and will remain at this level until 2020/2021. Therefore, it is likely that more estates will become subject to IHT.
Individuals are also able to use certain exemptions when making gifts during their lifetime. The current yearly allowance is £3,000. This was last increased in 1981 when the average London property cost £40,000. This perhaps indicates the need for some change.
In addition, the Residence Nil Rate Band was introduced last year as an additional threshold, applicable when property is gifted to direct descendants. This additional allowance may reduce IHT for some, but the rules are extremely complicated and some suggest that an increase to the Nil Rate Band would have worked better.
Who is affected by IHT
IHT receipts have recently reached a record high of £5.2 billion. However, IHT represents a small part of overall taxation. By comparison, income tax generated £177 billion in 2016/2017.
In addition, less than 5% of estates in the UK are subject to IHT liability. Only 22,600 estates were liable to IHT in 2017/2018.
Of course, only wealthier individuals are affected by IHT, although there is likely more scope for those people to manage their estate in order to reduce or eliminate their IHT liability. For example, trust structures are often used by wealthy families to shield their estates, whilst those not rich enough cannot afford to give away assets in their lifetime.
The review has been requested by the Chancellor due to IHT being ‘particularly complex’ and it is aimed at making the experience of those who interact with it ‘as smooth as possible’. At present, there are a significant number of people who have to complete forms unnecessarily and it is hoped the process can be simplified.
The review is going to cover three areas:
1. Practical issues including the process of submitting IHT forms and the administration and guidance surrounding this;
2. The complexity of the current rules and how they are perceived;
3. The scale and impact of distortions to taxpayers’ decisions, investments, asset prices or timing of transactions because of IHT rules.
The Office of Tax Simplification (OTS) are looking to consider user experiences of the IHT system and the complexities of the legislation. In order to consider this fully, an online survey has been designed to capture data. The survey is open until 8 June 2018 and can be found at www.gov.uk/ots
Getting legal advice
Administering estates can be complex and time-consuming. Even a simple estate where there is no IHT to pay can involve a number of hours of work by professionals such as lawyers and estate agents, drafting paperwork and obtaining valuations. Complicated estates can take a number of months and costs can become significant.
Quite often executors choose not to obtain legal advice in respect of probate matters in order to save on legal costs. Unfortunately for these people, they can often end up paying more tax as they are unaware of the reliefs and exemptions that are available.
Simplifying the allowances and reliefs could improve this situation, although the risk with simplification is that reliefs and exemptions are cut. The review will, therefore, need to be handled very carefully.
If you would like to discuss estate planning or inheritance tax then please contact our experienced team here at David Gray.