Could Inheritance Tax be abolished?
Rumours are swirling that Inheritance Tax may perhaps be abolished. It is tricky to navigate the current IHT regulations and many adults admit they find it baffling. Despite the ability for a couple to pass on £850,000 free of IHT, receipts this year increased by 8% to £5.2 billion.
In January, Philip Hammond, Chancellor of the Exchequer, took the unprecedented step of contacting the Office of Tax Simplification asking them to completely overhaul Inheritance Tax.
In April the OTS published a call for evidence, and analysing the questions that it asked it is obvious they are considering a radical review. Responses had to be returned to the OTS by 8 June and we are led to believe the report will be published before the 2018 Autumn Budget.
In May the Resolution Foundation, a leading economic thinktank, published their Intergeneration Commission Report. It strongly recommended radical reforms of our IHT system. The report stressed how inefficient the tax was. Indeed it cited examples such as inheritances and other gifts totalled £127bn in 2015/16 but the only tax raised was £5bn. This effectively equates to a rate of just 4%. Between 2006/7 and 2022/23 IHT receipts are forecast to grow at less than a quarter as fast a rate as inheritances.
The Resolution Foundation has recommended the current IHT regime is scrapped. The feasible alternative is to move to a lifetime receipts-based tax rather like the schemes currently in place in both France and Ireland. The concept appears tried and tested and would deliver both practical and perceptual benefits. Crucially, it would also increase tax receipts.
It would be a significant move away from our current system. The receipts based system involves individuals having to keep track of cumulative receipts. However gifts of £3,000 or less per donor per year and gifts between spouses, civil partners and charity gifts are excluded. There would be a cumulative gift allowance of initially £125,000 tax free, with the allowance being indexed in line with inflation.
Gifts between £125,000 and £500,000 would have a basic rate of 20%, and a top rate of 30% would apply thereafter. The estimate is that such a change would generate £11bn annually compared to the forecast of £6bn under the current system.
Some of the tax planning opportunities currently available would no longer be an option, namely the seven year cumulative gifting rule and the normal expenditure out of income exemption.
Agricultural relief and business relief which currently cost the Treasury £1.22bn, would also be better targeted to remove any predominantly tax-driven motivation for owning the assets. It is likely that the relief is to be capped, the minimum ownership period will be increased and the relief would ideally be limited to genuine farmers and business owners rather than the financially astute planners.
The trust tax regime, arguably the most complex, is likely to be redesigned to reflect the lifetime receipt rules and the thinktank also has some suggests for pension inheritance. These suggestions have caused concern as it recommends the removal of the tax free treatment of pension funds inherited on death of the member (under age 75). Their suggestion is to make it liable to inheritance and income tax.
Their final suggestion is that capital gains tax apply on death, although restricted to additional residential properties and assets qualifying for business property relief and agricultural relief.
Of course these are only suggestions from the Resolution Foundation and it is entirely possible that the Office for Tax Simplification may have a completely separate set of regulations that they will introduce. If these suggestions are implemented however, most hit would be small families, as there is a tax on the individual rather than two allowances from a couple gifting the money.
However, one thing that is very clear is that referring to IHT as a voluntary tax will be a thing of the past. This phrase was coined on the basis that careful planning can significantly reduce or even negate an individuals liability.
Anyone who has held off making gifts for IHT planning purposes or for anyone who has deferred having that initial IHT discussion, now is the time to act. It is vital to discuss this with an experienced, professional and impartial advisor. Call us now before the autumn report is published and significant opportunities are lost.