The prospect of an inheritance tax overhaul has led to an outpouring of suggestions from financial experts.
Top of the wishlist is ditching or revising ex-Chancellor George Osborne’s new property rules – you can pass on more than before without a tax penalty, but only if you own your home and give it to direct descendants.
Inheritance tax: Chancellor has ordered a review to help simplify the regime for taxing estates
The Chancellor has asked officials to look at whether inheritance tax ’causes any distortions to taxpayer decisions’, and how to simplify the current regime.
Inheritance tax was originally designed as a levy on the very wealthy, but soon about one in 10 people are forecast to leave estates sufficiently large to qualify, with the property price boom dragging many ordinary families into the net if they live in parts of the country with high house prices.
Below, we round up how financial and legal experts think Hammond should improve what he himself admits is a ‘particularly complex’ system.
Read more here about how inheritance tax works and Osborne’s new property allowance.
Ditch Osborne’s residence rules and raise threshold to £400k for all
‘The review should not turn out to be an endeavour to simply raise inheritance tax revenues which have been steadily rising due to increased property prices and a fixed nil rate band,’ says Ian Dyall, head of estate planning at financial service firm Tilney.
‘While I welcome the principle of simplifying the inheritance tax regime, I am also cautious about this announcement.
‘Simplification often is anything but as it inevitably leads to a new tax regime alongside the legacy regime and often turns out to be a euphemism for revenue generation.’
He went on: ‘Changes made in recent years have added complication. The new residence nil rate band is unnecessarily complex, particularly its interaction with trusts and the rules which allow for downsizing of the property.
‘Also, with the exception of the spouse exemption, for the first time the tax liability differs depending on who you leave your estate to, for example child or grandchild versus nephew or niece which may people regard as unfair.’
Dyall suggests: ‘If the Government really wants to simplify the regime, a quick win would be to scrap the residence nil rate band introduced by George Osborne, which is just too complex for people to really get to grips with.
‘Instead they might apply a higher standard nil rate band – of up to £400k per person from April 2020, rather than the £1million per couple that would be available to some couples from 2020 under the existing rules, provided they don’t fall foul of copious qualifying rules.’
‘A quick win would be to scrap the residence nil rate band introduced by George Osborne, which is just too complex,’ says Ian Dyall.
He adds: ‘Rather than being used as a method to mitigate IHT, we are mostly seeing parents and grandparents use their gifting allowances to help young people combat the headwinds they are currently facing.
‘The Government might want to consider a new exemption for any gifts made into Junior Isas or specifically towards a deposit on a first property for a child or grandchild as a way of accelerating wealth transfers.’
Look to Germany where hardly anyone incurs inheritance tax
‘This review is long over-due. The argument about inheritance tax has been going on almost since the tax was introduced,’ says Paul Falvey, tax partner at accountancy firm BDO.
‘Part of the complexity arises from a lack of consensus as to whether the tax is legitimate at all. The “for” camp argues that the tax prevents the over concentration of wealth in a small number of families which inhibits enterprise.
‘Those “against” argue that IHT taxes wealth a second or even third time, they suggest that if it were abolished, wealth would cascade down generations and stimulate economic growth.’
Falvey notes: ‘Generally people are more willing to see passive wealth taxed, except when it comes to their own home. This is an emotive subject, especially as for most people their house is by far their most important, or often their only significant asset.
‘They perceive inheritance tax as unfair even if they bought their home years ago and have benefited from rising house prices.
‘The “residence nil rate band” introduced in the Finance Act 2016 is an attempt to take family homes out of inheritance tax, but this has only served to make the system more complex and also limits relief to those who have children. Increasing the “standard” nil band would be far simpler and fairer.’
Falvey says the review should look at how other countries do this, like Germany where the surviving spouse has a personal allowance of €500,000 (£439,000) and each child of €400,000 (£352,000), so in most cases there is no or very little inheritance tax due.
‘If a German testator has, for example, a wife and two children he can pass on €1.3million (£1,1million) without any inheritance tax being due,’ he points out.
‘In practice, the inheritance tax free amount is in most cases even higher, because property (houses or apartments) is completely exempt from inheritance (on top of the personal exempt amounts listed above) if the property is used as family residence and inherited by the surviving spouse or civil partner.’
It is worth noting that Germany does not have the same problem with expensive housing as Britain.
Property rules: George Osborne tried to take most family homes out of inheritance tax, but his changes are widely condemned as confusing and unfair
Avoid tinkering that makes problems worse
‘When the government uses the phrase “simplification”, professional advisers fear the worst,’ said Wilfrid Vernor-Miles, partner at law firm Hunters Solicitors.
‘Ask any pensions adviser how “pensions simplification” has worked over the past 10 years.
‘A simplification of the inheritance tax rules is long overdue but any tinkering on the fringes only compounds the problem, such as the newly introduced and ill-conceived residence nil rate band.
‘More and more estates are falling into the inheritance tax net, which is generating twice the revenue it did only a few years ago, but still only raises less than 1 per cent of total UK government receipts.
‘Yet for those affected, it is an emotive topic and a minefield to navigate.’
Overhaul outdated gift rules and ‘arguably discriminatory’ residential rules
‘The review of inheritance tax is welcome news, as it gives an opportunity to make this legislation fit for the 21st century,’ said Andy Zanelli, tax planning expert at Royal London-owned financial adviser platform Ascentric.
‘Many aspects of the current inheritance tax regime are outdated and have not been changed for decades, for example the annual £3,000 allowance.
‘Whilst some have proposed a scrapping of the tax altogether, following countries like Sweden, I cannot see a government looking to bring the national debt under control turning off the inheritance tax tap.
‘Currently worth over £5billion a year, and rising, this tax burden will increasingly be paid by the “inadvertent millionaires” who don’t realise they have a problem and fail to plan.
‘Figures show that the larger estates avoid this tax as they can afford to get advice and are aware they have an issue.
‘The legislators should take this opportunity to address the hideously complex, and arguably discriminatory, Residential Nil Rate Band.
‘In an attempt to deliver a manifesto pledge it has confused many and introduced generational planning that turns the accepted “norm” on its head.’
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