Chancellor calls for a simplification on Inheritance Tax

The Office of Tax Simplification (OTS) has already highlighted inheritance tax (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 the 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 transactions.  Equally the government is keeping a keen eye on the use of trusts for tax planning purposes.

There has been criticism in recent years over the increasing complexity of inheritance tax and the introduction of the new residence nil rate band (RNRB) for deaths occurring on or after 6 April 2017 has created more confusion for taxpayers.

This new IHT allowance is a top-up to the existing £325,000 tax free IHT allowance (£650,000 for married couples and civil partners).  At present it is set at £100,000 for each individual, and this is set to increase by £25,000 on 6 April this year and again on 6 April 2019 and 2020 when it reaches its full amount of £175,000.

This means that in April 2020, the total nil rate band available to a married couple or civil partner couple will be £1 million with single taxpayers having a £500,000 allowance.  However, the new residential nil rate band which by then will be worth £175,000 (£350,000 for married couples and civil partners) is only available when there is a qualifying residential property in the estate which is inherited by direct descendants of the deceased.

Last August, HMRC was forced to issue revised guidance on how downsizing, selling or gifting a home affects the additional IHT threshold for RNRB relief, after admitting that the rules were ‘complicated’.
Both the formal and residence nil rate bands will increase annually in line with the Consumer Prices Index from April 2021 onwards.

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

Report by CCH Daily