The government has requested a review of inheritance tax (IHT), focusing on making the system less complicated.
The Chancellor, Philip Hammond, has asked the Office of Tax Simplification (OTS) for “proposals… for simplification, to ensure that the system is fit for purpose”.
The OTS has been asked to “focus on the technical and administrative issues within inheritance tax” and also to consider “whether the current framework causes any distortions to taxpayers’ decisions surrounding transfers, investments and other relevant transactions”. This means the OTS will be looking at simplifying the rules, instead of proposing radical reforms. The Chancellor is unlikely to reduce IHT revenue, as the tax is forecasted to raise £5.4bn in 2018/19.
Appropriately, the OTS did look at IHT when developing its ‘Complexity Index’ in 2015. The Index examined over 100 aspects of UK taxation, assessing their complexity and its impact. Unsurprisingly, IHT ranked close to the top for complexity – coming third behind two sets of capital gains tax computation rules. IHT earned this position thanks to no fewer than 94 reliefs and nearly 200 pages of legislation.
If the OTS repeated the exercise today, IHT could well come first because of the extra complexity added by the residence nil rate band (RNRB) and its associated downsizing rules. These rules led the then head of the Treasury Select Committee, Andrew Tyrie, to say, “The main beneficiaries of this [legislation] would be tax advisers and lawyers”.
You should not defer your estate planning because of the impending OTS review – there is no timetable for the OTS to respond, and their previous recommendations on income tax and national insurance contributions have yet to be implemented. If you have not reviewed your will since the RNRB started in April 2017, now is the time to do so. The RNRB could save your estate up to £70,000 in tax (up to £140,000 for a couple) by 2020/21 but, as Mr Tyrie made clear, it is far from straightforward.
If you would like to discuss how this may affect you, please get in touch.
The Financial Conduct Authority does not regulate tax advice. Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate will writing, trusts and some forms of estate planning. For specific tax advice please refer to a tax specialist.