The Chancellor has written to the Office for Tax Simplification (OTS) asking them to review and simplify the inheritance tax (IHT) regime noting that it and the ‘system within which it operates, is particularly complex’. The OTS have been asked to look at the process of submitting returns, paying tax, routine estate planning and disclosure and the rules for gifting. So this is a very wide ranging review. At this stage, we have no idea when the report will be made and whether there will be any changes to the amounts of IHT that must be paid.
There is plenty for the OTS to consider with a system that has become increasingly difficult for people to understand and with many feeling it is only the very wealthy who can afford to organise their affairs in a tax efficient way.
Here are 10 rules relating to lifetime giving and IHT on death – some of which might be ripe for change:
- You can give away a total of £3,000 each tax year, without any liability to tax. Other amount can be given away to children or grandchildren on marriage. These amounts have not been changed for years – should they at least be brought in line with inflation?
- You can make gifts to charities (but they must be registered in the UK) and political parties (but not political movements – as per recent gifts to the Leave campaign) free of IHT. Should these definitions be widened?
- You can give away any amount to an individual, and if you survive for 7 years, the gift will be free of IHT. If you don’t, the value of the gift falls back into your estate for IHT purposes, with the tax due on the gift primarily due from the recipient (unless you have said otherwise in your will). Should the 7 years be reduced?
- But if you give away an asset and continue to get a benefit from it e.g. transfer your house to your child, but continue to live there, it is not an effective gift for IHT purposes and the 7 year doesn’t start to run. Rules need to be made clearer.
- If you put money or other assets into a trust during your life, there may be an immediate liability to IHT depending on the amount, a charge when anything is taken out plus 10 yearly charges for the duration of the trust. Rules need to be made clearer and perhaps the tax charges should only ‘bite’ at one point.
- Transfers between spouses are entirely exempt from IHT, but not if the donee spouse is not domiciled here. Transfers between partners who may live together, but are not married or in a civil partnership are not exempt even if they are both domiciled here.
- Broadly, a person can give away up to the nil rate band (currently £325,000) on death without any liability to IHT and the balance off their estate will be subject to IHT at 40% (this is subject to certain conditions). The nil rate band has not gone up since 2009 and will not be reviewed until 2021 at the earliest. Time for an increase in the allowance?
- In April 2017, a new residence allowance was introduced where a home is passed on to your descendants. Not only are the calculations incredibly complicated, but it is only available to those with children AND who have a home AND who are married. Research shows that 70% of people have no idea how this new allowance works. Perhaps the nil rate band should just be increased for everyone?
- There are reliefs for certain types of business property and agricultural property, which may overlap and are available at varying amounts, but will depend on the type of business – which must be a trading company and not an investment company. Simplification please!
- Pension pots can now generally be passed on free of IHT, unlike most other assets and so for many people it is more tax efficient to live off other assets during their life and to pass on their pension pots.