24.07.19

Inheritance Tax is too complicated. It needs to be simplified

Inheritance Tax (IHT) has been described as ‘fiendishly complex’. A new report by the Office of Tax Simplification (OTS) offers 11 recommendations for simplifying it. When even the chancellor describes a tax as “particularly complex”, it’s a sure sign it … Find out more »

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Inheritance Tax is too complicated. It needs to be simplified

Inheritance Tax (IHT) has been described as ‘fiendishly complex’. A new report by the Office of Tax Simplification (OTS) offers 11 recommendations for simplifying it.

When even the chancellor describes a tax as “particularly complex”, it’s a sure sign it needs streamlining. As reported in The Times, the OTS has published a report urging Hammond to do just that – ironing out injustices and easing the burden on grieving families in the process.

The three areas that have received most attention are the tapered tax on gifts, the gift allowance and the residence-nil band introduced by George Osborne.

Reforming gift rules

Gifting is one of the more complicated areas of IHT. Under the present system, gifts made within seven years of death may be liable for tax.

Every individual has a £3,000 tax free ‘gift allowance’ per year, known as their annual exemption. This means that someone can gift assets or cash up to this amount, without it being added to the value of their estate for IHT purposes.

If Inheritance Tax is due, it will be charged at 40% on any gifts given within the first three years before they die. In some cases, gifts made three to seven years before their death may attract what is known as ‘taper relief’, meaning it will be taxed on a sliding scale.

Exceptions are granted for ‘small gifts’ – under £250 (per year, per person) – wedding gifts (under £5,000 from parents, £2,500 from remoter ancestors or £1,000 from anybody else) and contributions to living costs for elderly relatives or under-18s.

The OTS has recommended three key reforms to gifting:

  1. Raising the gift allowance to £13,000
  2. Reducing the seven year period to five
  3. Replacing the sliding scale with a flat rate

Director of the Probate Practice, Joel Weitzman, welcomed the recommendations, “The Inheritance Tax legislation is fiendishly complex and these recommendations make sense. The £3,000 allowance has not increased since 1981 so is well overdue for an increase. Similarly, the small gifts exemption has fallen in real terms so much that the necessary record keeping is excessively onerous.

The rules regarding the tapering of the tax due on gifts are often misunderstood and changes would be welcome.”

‘Unfair’ residence nil-band

The residence nil-band was widely expected to be included in the report. Although it is mentioned, recommendations for reform are conspicuous by their absence.

Under rules introduced by former chancellor George Osborne, those who pass their property on to their descendants are granted an extra £150,000 IHT allowance (increasing to £175,000 in 2020/21) , on top of the £325,000 everybody is entitled to.

However, the nil-band is tapered down where an Estate is worth over £2m, and there are further complexities if the Deceased has downsized from a larger property – discouraging many from doing so. This additional complexity for large Estates has attracted criticism from some quarters, alongside complaints that it is unfair to those who don’t own property or have children.

Mr. Weitzman commented, “It is surprising that changes have not been suggested to the residence nil rate band. This was heralded as giving all families a £1m Inheritance Tax nil rate band but is in fact riddled with complexities regarding those with Estates that are worth over £2m and those that have downsized, amongst others.”

The OTS simply concluded the legislation was too new and required more time for a full evaluation.

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