Inheritance Tax – Time for Reform

Inheritance Tax is considered the least popular and most complex tax in this country. However, a new allowance to offset IHT and new reforms of the IHT system are afoot.

Inheritance Tax (IHT), on the face of it, is a relatively simple concept. When you pass away, if your assets exceed the available allowances then IHT is paid at a rate of 40% on whatever part of your estate has exceeded those allowances.

However, not only is IHT considered the least popular tax in this country, the systems and allowances which have been developed to calculate how much should be paid have become increasingly complicated.

The current basic allowance, known as the Nil Rate Band (NRB), is set at £325,000 for each individual. Married couples and civil partners are entitled to transfer any unused NRB between them. Typically, a married couple will leave their assets to one another on the first of their deaths, and then divide the assets between other beneficiaries on the second death (usually their children). In this typical example, there would be no IHT on the first death as spouses are exempt from IHT when assets pass between them. However, it would also mean the first person who died did not use any of their NRB and so the surviving spouse now has two allowances totalling £650,000. If the estate of the surviving spouse totalled £700,000 then it would only be the £50,000 excess that would be taxed at a rate of 40%.

Over the years the NRB has gradually increased to reflect the fact that the value of people’s net worth is also increasing, although it has often been criticised that increases in the NRB have not kept up with increasing property prices. The end result is that more estates than ever are now subject to IHT.

THE NEW ‘RESIDENTIAL NIL RATE BAND’

In an attempt to address this issue the Government brought in a new allowance effective from 6 April 2017 known as the Residential Nil Rate Band (RNRB). This took a lot of professionals by surprise as the general approach had been to simply periodically increase the well known NRB.

A brief summary of this new allowance is that it entitles an individual to a further £100,000 allowance when they owned property that was ‘closely inherited’ and that individual’s total estate did not exceed £2m. This new allowance was also introduced in stages initially being £100,000 as of 6 April 2017, and increasing by £25,000 on 6 April each year until 2020 where it will finally settle at £175,000. The end result is that each individual who qualifies for the RNRB will have £500,000 tax-free, and again any unused RNRB can be transferred between spouses in the same way as the NRB. In summary, a married couple (who have children) would ultimately benefit from a combined allowance of £1m.

OTHER RELIEF FROM IHT

Although the NRB and RNRB are the primary allowances to offset IHT, there are a number of other factors and allowances that need to be considered, some of which are listed below. This article does not go into further detail on the factors and allowances below, although our Private Client Team would be happy to advise further if more specific advice is required.

• Business Property Relief (BPR) – If the deceased owned a business or shares in a business, the value of that interest may be exempt from IHT if certain criteria are met.
• Agricultural Property Relief (APR) – If the deceased owned property such as farmland, this too may be exempt from IHT depending on the circumstances.
• Quick Succession Relief (QRS) – If the assets you have inherited were already subject to IHT in the last 5 years then you may get a reduction in the tax due in the estate of the person who has died now.
• Potentially Exempt Transfers (Lifetime Gifts) – HMRC will take into account any gifts a deceased person made within the last 7 years, as these will reduce the amount of NRB available on their death. The reason they are known as ‘Potentially Exempt Transfers’ (PETs) is that they may become exempt if that person lives for 7 years after making the gift (subject to the below).
• Gifts with Reservation of Benefit (GWR) – HMRC has complicated rules where someone gifts away an asset but still continues to benefit from it. The most common example is parents gifting their property to their children to avoid IHT but they continue to live in that property. This property will still be treated as part of their estate for IHT purposes unless certain measures are put in place.

REVIEW OF CURRENT IHT SYSTEM

Many practitioners, and members of the public alike, now feel it is time the above rules and allowances are simplified. Fortunately, Chancellor Phillip Hammond has recently instructed the Independent Office of Tax Simplification (OTS) to launch a wide-ranging review into these issues in a bid to make “the experience of those who interact with it as smooth as possible”.

MORE INFORMATION 

What changes will come from this review remain to be seen, and Pinney Talfourd’s Private Client Team will keep you updated as and when progress is made in this area. If you would like further information on this, please contact our Private Client Department on 01708 229444 or email us using the form to the right.This article was written by Chris Dickinson, Associate at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of June 2018.