Are sweeping reforms to Inheritance Tax on the horizon?
In a recent letter to the Office for Tax Simplification (‘OTS’), Chancellor Philip Hammond has ordered a review into the UK’s inheritance tax regime.
The potential review comes amid sharp rises in inheritance tax receipts, with the Office for Budget Responsibility suggesting that well over £32 billion of inheritance tax could be paid between 2016 and 2022.
In his letter, the Chancellor calls the current system “particularly complex” and seeks proposals for “simplification”. As well as focusing on the technical and administrative aspects of inheritance tax, the Chancellor is also asking the OTS to consider how the current system plays into decisions taxpayers make about their estate planning, including lifetime gifts.
The argument for simplification comes less than a year after reforms to inheritance tax were introduced by Mr Hammond’s predecessor, the former Chancellor, George Osborne. Those changes saw a large and complex framework of new rules which, as of the current tax year, now enable a deceased person to pass on an extra £100,000 of their wealth free of inheritance tax. This new allowance will rise to £175,000 by the 2020/21 tax year, after which it will rise in line with the Consumer Prices Index.
At first glance, these new rules seemed favourable. But, perhaps unfairly, they only apply where the deceased leaves their main residence to direct decedents (i.e. children and grandchildren, whether natural, adopted or step), thus excluding those who choose not to buy property, or otherwise have no children or grandchildren of their own.
Over the years, reforms to the UK’s inheritance tax regime have been made for numerous reasons. Some have been designed to make avoidance more difficult, whilst others have been introduced with the aim of sparing those the inheritance tax system was never designed to catch. Politically motivated or not, they have all had one thing in common: to add complexity to an already complicated system.
With a tax code which is widely recognised as one of the largest and most complex in the world, whatever your view on inheritance tax, calls for simplification should not be ignored. A thorough review, and the will to make a change, could well make the inheritance tax system simpler and less burdensome for everyone.
But, with the Chancellor yet to outline his brief, and no deadline set by which the OTS is to report its proposals, watch this space.
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