Posted on Mar 06, 2018 in Private Client by Graeme Dickson
Although liability to pay Inheritance Tax (IHT) only in fact affects 5% of estates, there is a perception (especially given house prices) that the percentage is much higher. Given that last year, HMRC raised over £5.1bn from IHT it is easy to see why people think the tax hits more people than it does in reality. How to mitigate the potential effect of IHT and ensure that assets go to loved ones rather than the government is a common theme we are asked for advice upon.
But IHT and how it works may be changing with the Office of Tax Simplification recently announcing that a review is now underway. The effects could be significant especially given the proposed scope of the review.
We are promised that “the review will be to identify opportunities and develop recommendations for simplifying IHT from both a tax technical and an administrative standpoint.” Anyone who has ever had involvement with an estate where the IHT tax forms have had to be completed will know the process is far from simple or straightforward. The process often leads to complications, excessive investigations having to be undertaken by executors and delays all at a time when families are dealing with the aftermath of a bereavement. If the administrative process can be made more straightforward and quicker that is to be welcomed. It’s a tough goal but one I really hope they achieve.
There could be more obvious changes and they might impact on the plans people take while alive to mitigate the potential effect of the tax. These include a review of the “various gifts rules including the annual threshold for gifts, small gifts and normal expenditure out of income as well as their interaction with each other and the wider IHT framework” and the “complexities arising from the reliefs and their interaction with the wider tax framework”.
What that will actually entail is unclear but a proper appraisal of the current reliefs and exemptions is long overdue. Taking one example, when the law was introduced over 30 years ago(!), an individual could give away £3,000 a year as a gift without IHT ever applying. That limit has never changed when, even by a conservative estimate to keep up with inflation that should now exceed £8,000. The reliefs are often extremely complex and difficult to understand and this can especially be seen in the recently introduced main residence relief. Hopefully we will see a better and clearer system being introduced
However, it’s worth bearing in mind that there’s no guarantee that any proposed changes will be positive to the taxpayer. When a similar review occurred relating to settlement agreements for employees leaving their employment, the OTS proposals were somewhat negative and sought to reduce some of the major tax exemptions. “Simplification” can sometimes not be an improvement from a taxpayer’s point of view. Inheritance Tax, as mentioned, brings in a great of money to the Government and reducing that intake is unlikely to be high on their agenda!
The Office of Tax Simplification will soon be calling for evidence and opinions. We, in the Private Client Team, will definitely be contributing and if you want to highlight your views also, we’ll post up the link when it’s available so you can take part.
In the meantime, tax planning remains an important aspect that individuals and families should undertake if they are worried that IHT could be a issue. The Private Client team have depth of experience in providing advice and solutions now and for whatever the future may bring. With careful timeous preparation, IHT is a tax that can be significantly mitigated ensuring that the next generation benefits rather than HMRC. Even if IHT is not an actual risk, we’re always happy to discuss matters to confirm the position and help provide peace of mind. If you would like to have a discuss your tax planning needs, please contact Graeme on 01334 477107.
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