If ever there is a UK tax that needed a major overhaul, then Inheritance Tax (IHT) must be a top candidate. Many families will be delighted to hear that the Chancellor, Philip Hammond, has written to the Office of Tax Simplification (OTS) asking them to reform IHT “to ensure that the system is fit for purpose and makes the experience as smooth as possible”
Mr Philip Hammond in his letter asked the OTS to look at the technical and administrative issues with Inheritance Tax, the process of submitting returns and paying the tax. Mr Hammond also called for a review of the problems surrounding estate planning, and whether the current framework causes ‘distortions’ to taxpayers’ decisions regarding investments and transfers.
Property Price Rises and Rise In Inheritance Tax
In the 2016-17 tax year, HMRC raised a hefty £4.84 billion in Inheritance Tax, brought about mainly by rising property prices that are seeing more and more families drawn inexorably into the tax net, despite doing nothing more than owning their own home.
Inheritance Tax has undoubtedly made several aspects of financial planning more complicated. With the Bank of Mum and Dad currently a significant source of funding for house purchases for first-time buyers, the operation of the seven-year rule is becoming a vital issue that needs careful consideration in effective tax planning. The annual tax-exempt gift allowance of just £3,000 arguably needs a significant overhaul, as does the out of date amount of £5,000 that can be given away to offspring on their marriage.
Since the advent of pension freedoms three years ago, it has become more tax-efficient to pass on a pension than an ISA, meaning that some people have found themselves viewing their retirement savings in a whole new light.
Raising the Limit Across the Board
Given the individual threshold for Inheritance Tax has remained at £325,000 since 2009, many would argue that, rather than adding another layer of complication such as the RNRB, the most straightforward and fairest thing to have done would have been to increase the Nil Rate Bond to a limit that bore some correlation with the rise in house prices. Hopefully, that’s one of many thoughts currently crossing the minds of the Office of Tax Simplification.