Inheritance Tax Simplification

The legislation relating to Inheritance Tax (IHT) and particularly its interaction with Trusts is particularly complex. So it is encouraging to hear the Chancellor of the Exchequer has recently formally written to the Office of Tax Simplification (OTS) asking them to look at how the system can be improved to make it easier to submit returns and pay tax. The Chancellor has also asked the OTS to consider how the system is used for Estate planning and whether this causes any distortions on taxpayers’ decisions relating to gifts, investments and other transactions.

Whilst no details have yet been agreed about what areas are to be considered by the OTS, it looks as if the review will be wide ranging and should consider current reliefs and exemptions, such as:

  • The annual exemption – which has remained static at £3,000 since it was first introduced.
  • The way lifetime gifts are taxed at the moment, gifts made more than 7 years before death are ignored.
  • The new Residential Nil Rate Band, which was introduced by George Osborne and is overly complex. It also discriminates against unmarried taxpayers, taxpayers with no children and taxpayers who don’t own their own home.
  • How trusts are assessed to IHT. This was looked at few years ago but HMRC failed to take the opportunity to reform the way trusts are taxed.
  • 100% relief for agricultural and business property. The generous relief for let agricultural property might be changed as let business property does not attract the same level of relief.
  • The use of Deeds of Variation to change the terms of a Will, particularly where this results in a reduction in IHT.
  • The use of exempt assets such as investments listed on the Alternative Investment Market and investments qualifying for Business Property Relief.

When you add in the anti-avoidance legislation relating to gifts with a reservation of benefit and the Pre-owned Assets Tax legislation, the statutory framework for IHT is a minefield. Bearing in mind also that only 3.4% of Estates actually pay IHT, and only raised £4.7b in the tax last year compared to the £149.7b raised under PAYE.

The scope of the review will be announced over the next few weeks, we’re looking forward to this in hope that the Government will take this opportunity to reduce much of the complexity in the existing legislation.

If you would like to find out more about our services and how we can help with Inheritance Tax Simplification and planning, please just get in touch.