Philip Hammond recently wrote to the Office of Tax Simplification (OTS) requesting a review of the current Inheritance Tax (IHT) rules. The Chancellor described the current system as "particularly complex" and asked the OTS to identify ways to make declaring and paying IHT "as smooth as possible". The Chancellor has requested that certain areas should be focused on and some of the areas that he wished looked at include:
The current threshold for Inheritance Tax
The current IHT threshold (Nil Rate Band) is £325,000 for an individual. Any taxable estate above this level is taxed at 40% on death. Spouses are able to transfer their own allowance giving a couple a potential threshold of £650,000 between them. There are certain other reliefs and exemptions that can also be applied, but making use of these has further complexities.
When gifting during lifetime an individual can make use of certain exemptions, but often people are unaware of what these exemptions actually are. The current yearly allowance is £3000 (£6000 if you didn't make a gift in the previous tax year). In a recent article, The Telegraph outlined that this allowance was last increased in 1981 when the average London property cost under £40,000. This puts the need for change into perspective. Other exemptions include small gifts of up to £250 per recipient, up to £5000 as a wedding gift and regular gifts of surplus income in certain circumstances.
The complexity of "taper relief" is often misunderstood. In most cases, if you survive for seven years after a gift has been made, there will be no IHT payable. It's a common misconception that the tax is tapered if the individual dies three years following the gift being made. Taper relief is in fact rarely used as the gifts themselves need to exceed the Nil Rate Band before the relief can be applied.
Residence Nil Rate Band
The Residence Nil Rate Band (RNRB) was introduced in April last year. The additional threshold may have reduced IHT for many but the rules surrounding the relief have made things much more complicated. Amongst several other requirements, the RNRB can only be used by individuals leaving residential property to "direct descendants" (e.g. children, grandchildren etc). Perhaps adding this additional threshold to the standard Nil Rate Band would simplify things.
Get in touch
For anyone who is thinking about estate planning and ensuring that their assets pass on as tax efficiently as possible, please get in touch with your usual Harper Macleod contact.