Inheritance Tax – Where Are We Now?
If ever there is a UK tax that needed a major overhaul, then Inheritance Tax (IHT) must be a prime candidate. Many families will therefore be delighted to hear that the Chancellor, Philip Hammond, has written to the Office of Tax Simplification (OTS) asking them to put forward proposals for the reform of IHT “to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.”
His letter asked the OTS to look at the technical and administrative issues associated with IHT, the process of submitting returns and paying the tax. Mr Hammond also called for a review of the issues surrounding estate planning, and whether the current framework causes ‘distortions’ to taxpayers’ decisions regarding investments and transfers.
In the 2016–17 tax year, HMRC raised a hefty £4.84bn in IHT, brought about largely by rising property prices that are seeing more and more families drawn inexorably into the tax net, despite doing nothing more than owning their own home. IHT has certainly made several aspects of financial planning more complex. With the Bank of Mum and Dad currently a major source of funding for house purchases for first-time buyers, the operation of the seven-year rule is becoming a key issue that needs careful consideration in effective tax planning. The annual tax-exempt gift allowance of just £3,000 arguably needs a major overhaul, as does the out of date amount of £5,000 that can be given away to offspring on their marriage.
Since the advent of pension freedoms in 2015, it has become more tax-efficient to pass on a pension than an ISA, meaning that some people have found themselves viewing their retirement savings in a whole new light.
More controversial still was the recent introduction of the Residence Nil Rate Band (RNRB) which is both complex in its application and divisive in its outcomes. Former MP and now TV personality, Ann Widdecombe, was particularly incensed that under RNRB rules she wouldn’t be able to benefit by leaving her home to her niece, as the regulation only covered direct descendants, which she doesn’t have.
Raising The Threshold Across The Board
Given the individual threshold for IHT has remained at £325,000 since 2009, many
would argue that, rather than adding another layer of complication such as the
RNRB, the simplest and fairest thing to have done would have been to increase the Nil Rate Band to a limit that bore some correlation with the rise in house prices. Hopefully, that’s one of many thoughts currently crossing the minds of the team at the OTS.
It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment i n sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.
The information contained within this newsletter is for information only purposes and does not constitute financial advice. The purpose of this newsletter is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.