In theory, Inheritance Tax (“IHT”) is a simple tax – it’s charged at 40% on the assets in an estate above the IHT threshold, currently £325,000. However, various reliefs for certain kinds of lifetime gifts and the fiendishly complicated Residence Nil Rate Band (“RNRB”), as well as Business and Agricultural Property Reliefs, mean that it is, in fact, hard to understand and in some cases illogical.
The other thing about IHT is that people have to deal with it rarely, and when they are grief-stricken, so its complications cause more problems than would arise with a tax that people were familiar with in their ordinary lives.
Last year Philip Hammond asked the Office of Tax Simplification (“OTS”) to review IHT and how it works. In the Autumn it published a sensible report with a number of suggestions as to how to make the administration of IHT easier. Last week it published its report into the workings of IHT itself.
The report suggested as follows:
The report also suggested reviews of the IHT provisions relating to life assurance and pensions, Pre-owned assets tax and, generally, Business Property Relief and Agricultural Property Relief. So there’s plenty to go at.
The standout disappointment of this report is that it did not deal with the RNRB, which is an additional allowance for the family home provided it is left to direct descendants and the estate as a whole is less than £2million. This allowance discriminates against people who do not own a home or who do not have children. It was introduced in a hurry and does not work consistently with other IHT provisions; for instance, gifts made to charity are still counted as part of the estate for the purposes of the £2m threshold even though generally they are not part of the estate for tax purposes.
The report made the point that cancelling the RNRB and spreading the intended tax saving to all estates would increase the current tax threshold from £325,000 to £376,000 whereas the RNRB gives qualifying estates £475,000 (£500,000 next tax year). By the tax year 2023-4, just increasing the general threshold to £376,000 would still mean 5,370 more estates having paid IHT than under the current system. Cancelling the RNRB and increasing the basic threshold to £500,000, as many have suggested, would cost the Exchequer £7.5 billion over the next 5 years, so this is a non-starter. Overall, though, the report simply said that the RNRB (which was introduced in April 2017) had not been going long enough for any suggestions to be made.
The report makes interesting reading (at least for us!) and any simplification is to be welcomed but to us this looks like an opportunity missed.