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OTS reviews Inheritance Tax

View profile for Ben Taylor
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In February I wrote about the importance of reviewing your will and, in particular, about the need to stay on top of changes to the tax regime which might affect your estate planning (for those who missed it you can read it here).

As we near the 2018 Budget and the release of the Office of Tax Simplification (OTS) findings, I thought it would be a good time to reflect on the OTS review of Inheritance Tax (IHT).

What review?

Announced in January, the scope of the review by the OTS proposes to include the following:

  • the practical aspects of IHT and the administration of estates, the reporting requirements and returns;
  • IHT planning exercises, including gifts and trusts; and
  • the operation of relief (including Agricultural Property Relief (APR) and Business Property Relief (BPR)).

The consultation has now closed, with the OTS currently reviewing feedback.

Why is IHT being reviewed?

IHT is a relatively small source of tax receipt for the Government but, even so, an increasing number of people are paying IHT. It also didn’t go unnoticed when HMRC announced in the summer that the amount paid in IHT has continued to climb, topping £5b.

IHT is also a popular tax for politicians, frequently finding its way into the key manifesto promises, such as that which brought it the Residence Nil Rate Band (RNRB - more on that below!).

On top of that, tax professionals have long been calling for a review of the IHT regime, which has been tinkered with numerous times since the introduction of the Inheritance Tax Act 34 years ago. However, this isn't the first time the complexity of the tax legislation has been looked at, so we might be forgiven for being a bit sceptical about what changes will be made.

What can we expect from the review?

The most dramatic suggestion is perhaps the removal of IHT altogether. You might question if it’s likely the Government will give up any source of income at this time, particularly with Brexit on the horizon. You might also wonder how it would look for the Government to remove a tax which targets (many would argue) “wealthier individuals”. So in that case, is it more likely that it will be replaced, perhaps by a lifetime receipts tax similar to that found in other European jurisdictions?

An alternative is a shake-up of the current IHT regime. Here are some of the more interesting areas that might be looked at.

  • The Annual Exemption, currently £3,000 - there is a suggestion that it might be increased to £10,000, removing also the ability to benefit from any unused exemption from the year before.
  • Increasing the value of the permitted gifts (you can read more on these and the Annual Exemption in my colleague Robert Webb’s article here).
  • A refinement of APR and BPR - might the government simplify APR by allowing 100% relief for all let farmland (removing the complexities which can apply to AHA tenancies)? Will you still be eligible for BPR on Alternative Investment Market (AIM) portfolios?
  • Could we see trusts under threat again? The Settlements Nil Rate Band (SNRB) was rejected in favour of the RNRB, but could we see changes to the tax regime affecting trusts? Will this prompt more people to turn to Family Investment Companies, particularly if you consider the increased reporting requirements of trusts introduced by the Trust Registration Service and GDPR.
  • Could we get a rethink on the RNRB, which is generally disliked and considered too complicated for most people to understand (including advisers). The RNRB is a compromise designed to fulfil an election promise, which resulted in pages of legislation. Reporting is part of the review and notably having to utilise the RNRB can mean you need to file the more complicated IHT400, rather than the shorter and simpler IHT205. Here the government could “push the boat out” and simply increase the traditional NRB (which has been frozen since 2009) which would do away with the unfairness associated with the RNRB (such as in the case of cohabiting couples with children from previous relationships).

Whatever happens, the message is the same as it was in February, keeping your affairs and estate planning under review and up to date is the best way of ensuring your estate is dealt with as tax-efficiently as possible. Of course, if you have any questions Roythornes’ Private Client team is here to help.