Inheritance tax (IHT) has existed in the UK for more than 300 years. In its present form, it was brought in to replace the old Capital Transfer Tax; a measure that was brought in itself as a form of wealth distribution in order to control disparity between rich and poor.
While in theory the notion is relatively straightforward, in reality, the stipulations and red tape surrounding it in its current form can make it hard to get your head around. Indeed, earlier this year, Chancellor Phillip Hammond declared the existing system “particularly complex” and appealed to the Office for Tax Simplification (OTS) to hold a review of it. In his communication with the OTS he stated: “I would be most interested to hear any proposals you may have 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 way it is, in 2018 the IHT allowance stays at £325,000, as it has done since 2010, with no plans to increase it. For those who qualify however, the Residence Nil Rate Band Allowance (RNRB) increases the threshold by £125,000—this is planned to rise by £25,000 a year for the next two tax years, meaning that in 2020/2021 the RNRB will stand at £175,000. The IHT rate itself is firmly at 40% for anything above the £325,000 threshold, however if 10% of an estate is left to charity, the rate is reduced to 36%. Even with these limited examples, the complexity of the issue is abundantly clear.
The opportunity for simplifying IHT is unquestionably there—it all comes down to the will of the treasury. What’s more, in April of 2018, the OTS stated that it would “identify simplification opportunities” and invited feedback from those with personal experience of IHT. We can be certain that there will at least be a review of matters including reliefs for things such as business and agricultural property, the RNRB allowance, exemptions and the taxation of trusts.
Simplification of IHT would be welcomed by many, but legislation changes leading to increased taxes would likely prove politically unpopular under the current government. Only time will tell whether or not we see simplification in the near future, but the changes are surely achievable.
The Financial Conduct Authority does not regulate tax advice. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
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