Private Client Industry Gives Two Cheers At Moves To Overhaul UK Inheritance Tax

Tom Burroughes Group Editor London 1 February 2018

Private Client Industry Gives Two Cheers At Moves To Overhaul UK Inheritance Tax

The UK government is reportedly looking to simplify the inheritance tax regime and firms in the sector say the system is "long overdue" for reform.

The UK government is reportedly considering major changes to the country’s inheritance tax regime in a bid to simplify the system, a move hailed as necessary by industry practitioners. Advisors, however, do not expect a politically vulnerable government to embrace radical change.

Philip Hammond, Chancellor of the Exchequer, aka finance minister, has ordered a review that brings in areas such as how returns are submitted, the making of IHT-free gifts and estate planning, a number of media reports said this week. It is not clear at the time of writing if the 40 per cent tax bite on estates over a certain value will change, however.

Hammond has written to the Office of Tax Simplification to review IHT; the £325,000 ($459,694) nil-rate band has been unchanged since 2009 and is slated to stay at the level until 5 April 2021, even though average valuations of estates may rise over that period, a situation lifting more people into the tax net.

“This [simplification] is long overdue,” Nimesh Shah, a partner at accountancy, tax and advisory practice Blick Rothenberg, said, “but the review should not be restricted to IHT. The whole personal tax system and the way that we pay it is a mess and is in urgent need of simplification.”

At present, estates more than £325,000 are subject to IHT, a level known as the “nil-rate” band. Inheritance tax or estate taxes as they are known in the US, continue to be a political battleground at a time of widespread commentary about wealth inequality in Western countries. After the 2008 financial crisis and the money printing of central banks, arguably wealth gaps have widened as holders of equities and property have benefited at the expense of those depending on cash and fixed income.

The Conservative-led government, which lost its overall majority in the House of Commons last June, may struggle to push through a radical tax-cutting agenda, but Hammond may try to simplify the system in certain ways, if only to prove the administration can still deliver reforms that are seen to benefit middle class voters whom the Conservatives need to retain power at a future election.

“Instead of simply increasing the IHT nil-rate band, the government introduced an additional nil-rate band, applying to the main residence, creating unnecessary complexity,” Blick Rothenberg’s Shah said.
“With rising house prices over the last decade, more people are coming within the IHT net and it is vital that the system is looked at carefully and modified appropriately so that it is simplified and fit for purpose,” he said. “People are confused about what their children and grandchildren will have to pay in IHT, and many have become concerned that their Wills do not even reflect the current rules, which could mean their estates end up paying more tax,” he continued.
“In addition, numerous changes to the IHT treatment of trusts have resulted in difficulty for individuals and their accountants to calculate the right amount of tax. A number of the facets of the UK’s IHT system are hugely out-of-date, such as the annual exemption for gifts, which has remained at £3,000 since 1981,” he added.
Anthony Nixon, partner and inheritance tax expert at Irwin Mitchell Private Wealth, said: “It is good to see the Chancellor of the Exchequer taking an interest in simplifying inheritance tax (IHT), which is well overdue.

Nixon said he hoped the government will reform, or even scrap, the “ridiculously complex new IHT allowance linked to the value of one’s home, known as the Residence Nil Rate Band (RNRB)”. “Put plainly, it discriminates against those who do not own their own home, those who do not have children, and those who not married. The current £325,000 allowance, which has been fixed since 2010, could then be raised for everyone,” Nixon said.

He also suggested Hammond could review IHT rules for trusts, saying that the opportunity for reform was missed by HMRC in a recent review.  “It should be easier for those worried about their own improvidence to be able to create a trust for their own benefit, without tax penalties,” Nixon said.

IHT reliefs for businesses and, particularly, farmers, should be made simpler, he said.

Generally people are more willing to see passive wealth taxed, except when it comes to their own home," Paul Falvey, tax partner at BDO, said.

"This is an emotive subject, especially as for most people their house is by far their most important, or often their only significant asset. They perceive IHT as unfair even if they bought their home years ago and have benefitted from rising house prices. The ‘residence nil rate band’ introduced in Finance Act 2016 is an attempt to take family homes out of IHT, but this has only served to make the system more complex and also limits relief to those who have children," he continued.

“Increasing the ‘standard’ nil band would be far simpler and fairer. A specific exemption for the home has been suggested, but this could further increase house prices and reduce people’s willingness to move.  The detailed scope of the review is yet to be determined but we would hope that the OTS (Office of Tax Simplification) takes a more wide-ranging approach than is suggested by the Chancellor’s letter. For example we would like to see the OTS compare the UK system to other countries systems such as Germany," Falvey said.

“In Germany the surviving spouse has a personal allowance of €500,000 and each child of €400,000, therefore, in most cases, there is no (or very little) German inheritance tax due. If a German testator has, for example, a wife and two children he can pass on €1.3 million without any inheritance tax being due. In practice, the inheritance tax free amount is in most cases even higher, because property (houses or apartments) is completely exempt from IHT (on top of the personal exempt amounts listed above) if the property is used as family residence and inherited by the surviving spouse or civil partner," he added.

Separately, a survey of 1,001 UK citizens aged 45 or over by Canada Life found that most of them (70 per cent) do not know the threshold for the standard nil rate band (£325,000). Some 38 per cent did not think their main home is liable for IHT. The results suggest many citizens are unprepared for unexpectedly large tax bills.

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