Inheritance tax under review
Could a simplification exercise finally simplify convoluted inheritance tax rules, asks Martyn Thornhill, Wealth Planning Director
Chancellor Philip Hammond wrote to The Office of Tax Simplification (OTS) in January asking them to carry out a detailed review of inheritance tax (IHT). The OTS had previously expressed the view that it was a tax that could be simplified.
One recent example of unwarranted complexity is the new residence nil-rate band (RNRB), which was introduced in 2017/18 and will gradually increase from £100,000 per year to £175,000 per year by April 2020. This allowance provides an additional nil-rate band for property on top of the standard band of £325,000 per year, provided that certain conditions are met.
The RNRB has attracted some criticism for its specific focus on property ownership and because it only applies to property passing to direct descendants. Leaving these political aspects aside, it is also extremely complicated and therefore difficult to explain. There are anomalies in the way it interacts with gifts and the valuation of the taxable estate.
Clearly, the current rules do cause significant distortions, some of which may be in favour of taxpayers, such as certain types of assets that attract IHT relief or those that qualify for additional allowances. So, we should be careful what we wish for.
The simplification exercise should be welcomed, assuming it is carried out successfully
At this point we do not know how much a ‘simplification exercise’ will persuade a government to seek changes to IHT legislation or how this could impact the various IHT reliefs. It may be that its focus will be on the administration and collection of the tax, together with reduced complexity in some calculations, such as those around charges on certain trusts.
Making things simpler
Some financial advisers will shudder at the mere mention of ‘simplification’, remembering the ‘pensions simplification’ that came into effect in 2006. While some of the effects of that legislation have been positive, much of the original concept of ‘simplification’ was lost over the years.
The original thinking behind pensions simplification should still have some bearing on how the OTS addresses IHT. The intention was clearly to make pensions much easier to understand and offer protection for those who had relied on previous rules.
Overall, the simplification exercise should be welcomed, assuming it is carried out successfully. This would require deep and very thorough consultation with all interested parties – in particular professional advisers, who deal with the tax – prior to introducing any major changes.
Wealth Planning Director
Martyn joined in 2001. He focuses on providing holistic wealth planning advice to clients and works alongside our Portfolio Managers. Prior to joining Cazenove, Martyn worked in banking for 13 years and then worked for 9 years in a City based role for a leading insurer. Martyn has a degree in European Studies from the University of Bradford. He is a Chartered Financial Planner. Martyn has 25 years' financial planning experience.
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