Government review of inheritance tax

The sheer complexity of inheritance tax can make an unwelcome situation even harder, particularly if encountered after a death when so many other demands are made upon the family’s time, attention and emotions.

In April 2018, at the request of the Treasury, the Office for Tax Simplification published a call for evidence to gather information about people’s experience and perceptions of inheritance tax (IHT).

The aim was to review a range of aspects of IHT and how it functions, with a view to identifying simplification opportunities, but the continued existence of IHT and its basic principles are not up for debate.

We responded by highlighting areas of complexity which present practical difficulties for our clients.

Our observations included:

Lifetime exemptions – the values of the annual exemption and small gifts exemptions have not changed for over 30 years. As a result, many clients do not realise that cash gifts of a few hundred pounds here and there can quickly exceed the exemptions and such gifts may need to be reported on death even if the ‘normal expenditure out of income’ exemption applies. An increase in these allowances would be a welcome simplification.

Residence nil rate band – this was introduced with effect from April 2017 so that the Government could claim it had fulfilled – at least for a few – its pledge to increase the IHT nil rate band to £1 million. The operation of this additional nil rate band is complex. The full allowance is not available for estates over £2 million and the relief only applies where there is residential property passing to ‘direct descendants’.

There are some ‘saving’ provisions which give it slightly wider application, but it has introduced an unnecessary level of complexity into the legislation in order to achieve a political imperative without a significant cost to the Treasury. It would be preferable to abolish this and increase the general nil rate band even if this means the £1 million pledge is not fulfilled.

Administration – a frustration common to professionals and clients is the difficulty of dealing with HMRC. All too often correspondence goes unanswered for many months and responses are incomplete or even inaccurate. Investment in adequately resourcing HMRC’s IHT office would, in our view, result in more effective tax collection and ease the process for tax payers and professionals alike.