Inheritance Tax Latest: A Timely Overhaul of Death Duties?
9 July 2019 by Amy Burton
A recent report commissioned by the Chancellor of the Exchequer, Philip Hammond, confirms what many people have been thinking for years; that the over-complex and outdated inheritance tax regime needs to be brought into the 21st century.
In the second phase of its report published on 5th July, the Office of Tax Simplification (OTS) (an influential independent adviser to the government), commented on a number of issues within the archaic inheritance tax regime stating that it is “uniquely unpopular”.
What is the Residence Nil Rate Band?
One such issue was in relation to the Residence Nil Rate Band, which is the additional inheritance tax allowance introduced in April 2017. Put simply (and we do emphasis this point!), this allowance can be claimed if you own (or have recently owned) a property that you wish to leave to your direct descendants upon your death. However, as well as being hugely problematic to actually claim, it also creates a significant level of unfairness to those who do not have children, those who wish to benefit their elderly siblings or for whatever reason do not own a property to pass on upon their death.
In fact, the OTS specifically commented that they had received many comments about the effectiveness of the Residence Nil Rate Band from both members of the public and tax professionals. In their report, they address most of the concerns that have been raised, and where possible provide suggestions as to how to tackle these problems, but their conclusion is not overly optimistic. They summarise that “the residence nil rate band is still very new, and more time is needed to evaluate its effectiveness before recommendations can be made on how to simplify it”.
They have however put a few recommendations to the government, including abandoning the new allowance and just raising everyone’s single nil rate band (the amount that every person can leave tax free upon their death). They suggested that the government should consider these alternatives when they review the matter.
Should gifting allowances be reformed?
The OTS also suggested that the gifting allowances should be reformed. Currently, there are a number of individual inheritance tax exemptions that can be claimed for small gifts and wedding gifts, to name a couple. They have proposed that these individual exemptions should be abolished and a new, higher, annual exemption be introduced. At present, this annual exemption is £3,000, and the OTS, whilst staying silent on what they would propose for a new threshold, referenced the fact that if this amount had stayed in line with inflation, it would currently stand at £11,900.
Many of our clients also ask us about the so-called 7-year gifting rule. As the name suggests, at the moment, if you gift away an amount over your annual exemption, you would have to survive 7 years before this gift would fall outside of your estate for the purposes of your inheritance tax calculation.
The OTS recognise that whilst prima facie this is relatively straightforward, it can get rather complex when calculating the inheritance tax due when someone dies before the 7 year anniversary of the gift. This is due to a calculation referred to as taper relief. It effectively reduces the tax attributable to that gift on a year by year basis.
One of the OTS’s recommendations was to simplify the structure of this ‘rule’ and lower the anniversary to 5 years post-gift. This would however be on the basis that if you died 4 years and 364 days after making the gift, the full attributable tax would be payable – so there would no longer be a tapered rate of tax. As to how beneficial this would be, remains to be seen, but it would certainly ease the administrative burden of completing the inheritance tax return.
If you wish to review the OTS Inheritance Tax review: Simplifying the design of the tax report in full, please click here to be taken to the gov.uk page.
If any of the recommendations made by the OTS are implemented by the government, they will only be baby steps in simplifying the current inheritance tax regime, but steps that will be appreciated by many and certainly in the right direction.
We will, therefore, have to watch this space, albeit with bated breath.
If you have any concerns about inheritance tax or making a Will, then please feel free to contact our Wills, Life Planning, and Probate department who will be more than happy to assist. Please contact us on 01206 700113 or [email protected].