HM Insights

Key workers and the death in active service inheritance tax exemption

Should the government extend the death in active service inheritance tax exemption to include key workers who die from coronavirus (COVID-19) contracted during their work?

When someone dies leaving an estate exceeding the Inheritance Tax Nil Rate Band, currently £325,000, Inheritance Tax is generally charged at 40% on the surplus. There are, however, a number of exemptions to this general rule - for example where an estate passes to a surviving spouse or civil partner, in which case it will pass without any liability to Inheritance Tax regardless of the value.

Lesser known exemptions include the estates of personnel in the Armed Forces who die on active service or who die later from an injury or disease contracted while on active service. In this situation the deceased's estate also passes to the beneficiary tax free.

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Emergency responders

This particular exemption available to the Armed Forces was extended in 2014 to cover deaths of emergency responders when they are responding to emergency circumstances. The definition of "emergency responders" already include medical staff, but HM Treasury is under increasing pressure to extend the definition under the current circumstances to include all key workers, as they are at increased risk of contracting Covid-19. This would mean that any key worker dying as a result of contracting Covid 19 in carrying out their work duties would be considered "an emergency responder responding to emergency circumstances" and thus benefit from the tax exemption.

Future reform of inheritance tax regime

The Chancellor's March 2020 budget took place against the backdrop of the unfolding Covid 19 pandemic. The focus was on supporting the UK economy in the public health crisis rather than a root and branch reform of the current Inheritance Tax regime, as recommended by the All Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness, reported in January 2020.

The report suggested substantial reform of the current rules, recommending that the bureaucratic patchwork of reliefs and exemptions be abolished and replaced by a simpler, more streamlined system. The present system results involves much form filling on behalf of executors followed by much scrutiny by HMRC - yet only 4% of estates actually pay any tax. The total tax revenue for IHT receipts only accounts for 1% of the UK government's tax income.

The proposal from the APPG replaced the current system with a simpler, flat rate of IHT of between 10% and 20% depending on government priority. It would abolish all of the present reliefs and exemptions and replace them with an annual gifting allowance, to encourage lifetime gifting and on death, a lower death rate allowance.

A more effective and efficient system of inheritance taxation may well be back on the agenda in the future and to ensure your estate planning maximize the reliefs and exemptions currently available, expert and legal advice is a must, particularly in the ever changing world.

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