The COVID-19 pandemic has led to a level of government spending, unprecedented in peacetime conditions. The previous Conservative Chancellor of the Exchequer, Sajid Javid, had even broached the abolition of Inheritance Tax (IHT) as part of a wealth generation focused strategy.
IHT has long been viewed as a voluntary tax, in that the intended targets of the tax can avoid it by careful planning and the advice of experts. The widespread avoidance led in 2019 to the creation of an all-party parliamentary group to focus on the options for future reform. This group reported in January 2020 and the Treasury are reviewing their findings.
The current system in a nutshell
There is normally no tax to be paid if:
- The value of your estate is below the Nill Rate Band (NRB) of £325,000, or
- You leave everything above the threshold to your spouse or civil partner, or
- You leave everything above the threshold to an exempt beneficiary such as a charity
If the value of your estate is above the NRB, then the part of your estate above the threshold might be liable for tax at the rate of 40%.
The NRB is fixed at £325,000 until the end of the 2020/21, tax year, but your NRB might be increased if you’re widowed or a surviving civil partner. Couples can transfer any unused NRB when the first person died to the survivor. This can double the amount of NRB available up to £650.000. This extra transferable element is known as Transferable Nil Rate Band (TNRB).
The Residence Nil Rate Band (RNRB)– also known as the home allowance is on top of the NRB and the TNRB. To be eligible you must pass your home or a share of it to your children or grandchildren. This includes stepchildren, adopted children, foster children but not nieces, nephews or siblings.
The RNRB allowance is currently £175,000 in 2020/21 and will rise in line with the Consumer Price Index thereafter. You may also be able to use any unused RNRB from your spouse or civil partner’s estate if you’re widowed or a surviving civil partner. This can double the amount of RNRB available to £350,000. There are restrictions if the home has a value in excess of £2 million.
Some gifts and property are exempt from Inheritance Tax (IHT), such as some wedding gifts and charitable donations. Relief might also be available on certain types of property such as farms and business assets.
If you gave a gift in the seven years before your demise, it’s counted as part of your estate, and likely to incur IHT. How much tax is due depends on the value of the gift, when it was given and to whom.
What IHT reforms could ensue
The Treasury will review the suggestion of the parliamentary group, which include the following.
Abolish IHT and replace it with a Capital Transfer Tax, similar to that operated in Ireland. All reliefs would be abolished and a flat rate tax of between 10% and 20% would be imposed on all transfers of wealth (lifetime and death).
If the current system is maintained, then potential reforms be introduced:
- HMRC and the treasury should be given greater powers to collect more detailed information on current taxpayer behaviour through compulsory electronic reporting of all lifetime gifts in excess of £3,000
- the current £325,000 allowance should be retained and gifts between spouses and to charity would still qualify for relief
- there would be an annual exemption of £30,000 and all lifetime gifts in excess of this would be taxable.
Winners and losers
For some, the changes may be beneficial, particularly for those families whose wealth is concentrated in the family home and who are therefore unable to engage in lifetime IHT tax planning.
However, the changes could hit families that own farmland or trading businesses the hardest. Under the current regime, these assets commonly benefit from 100% relief (Agricultural Property Relief/Business Property Relief) allowing businesses to be passed down to children and grandchildren without the need for assets to be sold to pay tax liabilities. Under the proposed changes, these families could find themselves with a bill for up to 20% tax. Whilst it has been suggested that any liability could be paid in interest free instalments, the cash would still need to be found either by selling the assets or from the recipient’s net income.
Mandatory reporting of lifetime gifts in excess of £3,000 would create significant additional compliance obligations for many people. Whilst technology should hopefully reduce the impact of this burden, it could end up as another report people are forced to deal with or face penalties.
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