Inheritance tax review - possible changes ahead
On the 19th January 2018, the Chancellor Philip Hammond wrote to the Office of Tax Simplification (OTS) to request a review of the inheritance tax regime. Earlier this month, the OTS confirmed they would publish a report in autumn 2018. This report will evaluate sections of the current inheritance tax rules and identify ways to make them more simple, as well as making specific recommendations to the government on how to achieve this.
Although, inheritance tax is widely unpopular it is unlikely that inheritance tax will simply be abolished. Currently, inheritance tax is paid in fewer than 1 in 20 deaths in the UK (with it being paid in around 1 in 40 deaths in Scotland) but raises approximately £5billion each year. For this reason, it is unlikely that the UK will join the growing list of countries in recent years who have abolished inheritance tax completely like Sweden in 2004 and Norway in 2014.
The inheritance tax system has arguably become more complicated in the UK in recent years. The residence nil rate band was introduced in April 2017. This additional allowance is available to those who have a direct descendent and leave qualifying assets to them. By the tax year 2020/21 this will be worth an additional £175,000. This is in addition to the £325,000 inheritance tax nil rate band allowance that each individual already receives and the transferable nil rate band which may be worth an additional £325,000 for those that can claim. This means that a married couple could leave assets to their children from 2020/21 of up to £1 million free of inheritance tax. Many tax experts have called for a rethink of the residence nil rate band as it is complex. There are also those who think that this allowance is unfair as it discriminates against those who do not have descendants. While the OTS have not explicitly said they will review the residence nil rate band, it is possible that simplification of the current rules could be recommended.
In Philip Hammond’s letter he states that the review should include a focus on how current gifting rules interact with the wider IHT system, and the OTS have confirmed that they will address this. Something that they may recommend is introducing a larger annual exemption. This is currently set at £3,000. This means that every year each individual is entitled to gift £3,000 to an individual or number of individuals without any inheritance tax implications. This can be carried over for a year if it has been unused in the previous year. The rate of £3,000 has been unchanged for the past 30 years. Hargreaves Lansdown recently advised that if this had increased in line with inflation it would be about £9,500.
A further area of inheritance tax that may be under review is taper relief. This only applies where an individual has gifted sums over £325,000 (i.e. the nil rate band for inheritance tax). If you gift sums over this amount, then the inheritance tax that your estate will require to pay on that sum reduces for each year that you survive from year 3. By year 7 any inheritance tax implications disappear entirely. The review may focus on the implications of providing taper relief for smaller gifts. The OTS have confirmed that they will look at how complexities can result from the use of inheritance tax reliefs such as taper relief.
It will be interesting to see what the review recommends and whether any of these are eventually implemented. As always, is important to seek professional advice to ascertain the likely inheritance tax exposure of your own estate. There is still a great deal of confusion as to the extent of the reliefs and exemptions available some of which may apply to you, this is something that a professional adviser, such as a solicitor, can assist you with.