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Making The Tough Times A Little Easier

Making The Tough Times A Little Easier

Chancellor Philip Hammond has urged the Office of Tax Simplification to review inheritance tax (IHT) to ensure that the system is “fit for purpose”. Britain’s IHT system is among the most complex and onerous in the world and has become increasingly difficult to understand in recent years, causing anxiety and anger, often needlessly so. The following are some of the areas that might be considered for simplification.

Nil Rate Band

The Chancellor’s request comes less than a year after George Osborne’s reforms, which introduced a further IHT threshold for people who leave their residence to direct descendants. This was introduced in part to follow through with the Conservative party’s manifesto in 2010 which promised a nil rate band between spouses / civil partners of £1million. However, when introduced its provisions were overly complex. A far more straightforward way to streamline the IHT system would be to scrap this convoluted additional threshold - which favours individuals with children - and to increase the standard nil rate band (which was set at £325,000 in 2009) to £500,000 per person.

Lifetime Gifting

Lifetime gifting should also be reviewed. Currently, an individual can gift up to £3,000 per year tax-free – this exemption has remained the same since 1981. If it had increased in line with inflation, it would now be £9,500. There are also widely misunderstood rules in relation to gifting in the seven years before death. Broadly speaking, there is no IHT payable on a gift if you survive for seven years. However, there are a series of complicated rules if the gift is made within the seven-years period, including tapering of any tax on the gifts. However, in one of the most misunderstood aspects of IHT, these gifts must exceed the nil rate band before any tapering can be claimed on the excess.

Trusts

A general review of trust taxation was announced in the Autumn Budget and it will be interesting to see how this review will tie into the IHT system. In 2006, a range of trust regimes were merged into two tax structures, resulting in confusion and harsher tax treatment. It is important that the reviewers bear in mind that most trusts are created for non-tax purposes, such as protecting assets or vulnerable beneficiaries.

The ongoing IHT charges on some types of trust, which are incredibly complex to calculate, have already been targeted for simplification, but with nothing yet following on from this, this is another area which is likely to be reviewed.

In the coming months, we should have a better understanding of the scope for the review, particularly which areas of IHT will be considered.

Amanda Davy
Solicitor

This article was published in The Herald on 19 February 2018

LChalmers