Posted on 9 February 2018
Birmingham accountants and tax experts Friend Partnership welcome Chancellor Philip Hammond’s review of the Inheritance Tax regime and we set out our wish-list of what we would like to see in the review.
Chancellor Hammond has asked the Office of Tax Simplification to review the Inheritance Tax (IHT) regime, arguing that it is overly complex and requires simplifying. Like much of the UK’s tax regime, the IHT legislation is indeed horrendously complicated and even the most well-educated taxpayer, who is not a financial expert, will struggle with some of the rules.
So what would the tax team at Friend Partnership like to see considered in the IHT review?
The main residence nil rate band should be simplified and made fair for all
The new main residence nil rate band is a classic example of a complex tax relief that is only of benefit to a section of the taxpaying public. Some may say that it is discriminatory as it only benefits those who own their own home, are married and have children.
Even when it is potentially available to taxpayers, unless they pay close attention to the rules they can easily come unstuck. If wills are not drafted correctly then the added relief may then not be secured on death.
This main residence nil rate band was sadly a lot of political capital for a small tax cost. Whilst it gave the Chancellor the headline – £1 million IHT nil rate band – all is not quite what it seems!
Simplification is to be welcomed as long as it is fair for all. We would like to see the nil rate band increased, with no strings attached, to say £500k.
This would be a far simpler measure than having the two separate nil rate bands.
Lifetime gift limits to be increased
Having to survive a gift by seven years for it to fall out of account can materially affect the planning that taxpayers are willing to consider. With life expectancies extending it is clearly very difficult for taxpayers to predict how much money they might need in retirement, and thus how much of their capital they may be able to give away.
Increasing the annual exempt amount from the current £3,000 would help those wishing to give away smaller amounts during their lifetime.
Protect BPR and APR to support innovation
Business property relief and agricultural property relief could be easy targets for the review as they could be viewed by some as benefitting those who do not need tax breaks, as they have wealth tied up in their businesses or farms.
However, these reliefs are part of a range of tax measures that genuinely support entrepreneurship in the UK. If business property relief were to be radically reformed, those running businesses might be less inclined to take the risk with a knock-on effect in all sorts of areas.
For many wealthy taxpayers the new pension freedoms, and in particular the beneficial IHT treatment of pension savings on death, mean that the pressure on planning to avoid IHT may be less important than it has been in the past. Taxpayers are more inclined now to save in to a pension scheme which in theory does take pressure off the Government finances.