Inheritance tax review ordered by the government

Chancellor Philip Hammond has written to the Office of Tax Simplification (OTS) to order a review of inheritance tax (IHT).

He argued that the system is ‘particularly complex’ and needs simplification. The review, he wrote, should focus on the technical and administrative issues with IHT, as well as practical issues around routine estate planning and disclosure.

He added that current gift rules could also be reviewed. In the letter Hammond said: ‘I would be most interested to hear any proposals you may have for simplification, to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.'

The letter adds: 'It could also look at how current gift rules interact with the wider IHT system, and whether the current framework causes any distortions to taxpayers' decisions surrounding transfers, investment and other relevant transactions.'

In the last tax year, HMRC received £4.84 billion in inheritance tax. Rising property prices and a static IHT threshold, which has remained at £325,000 since 2009, have been the biggest drivers behind death tax payments rising

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: ‘Anyone who has ever wrestled with estate planning and inheritance tax can appreciate that the whole system can be a nightmare of complexity.’  

According to Coles one area to be reviewed might be to do with transfers that are potentially exempt from IHT. The current rules state that after seven years, any gift is considered out of your estate for IHT purposes. ‘This rule is widely misunderstood, and in certain circumstances IHT can still apply to gifts made up to 14 years before death. It can also encourage people to make large gifts before it makes financial sense for them.’ She says there has been speculation this could be reduced to two years.

The status of pensions and Isas might also be reconsidered. Since pension freedoms, it has become more tax-efficient to pass on a pension than an Isa, because the former is free of IHT in most cases, while Isas are not. Coles says: ‘Death taxes have always had the potential to distort planning decisions, but since the pension freedoms, the IHT efficient solution has been to take a U-turn on how you spend your retirement savings.’

Elsewhere, Anthony Nixon, partner and inheritance tax expert at Irwin Mitchell Private Wealth, says he hopes for a reform, or perhaps an abolishment, of ‘the ridiculously complex new IHT allowance linked to the value of one’s home’. The residence nil rate band (RNRB) was introduced last year by the government to stop families with modest incomes being liable for IHT.  

In a nutshell the RNRB, used together with the existing allowance of £325,000 per person or £650,000 for married couples and civil partners, will enable couples with a home to pass on up to £1 million to their direct family free of inheritance tax. 

-New inheritance tax rules: everything you need to know

Nixon, however, is not a fan. He argues it ‘discriminates against those who do not own their own home, those who do not have children, and those who not married.’ Instead, he argues, the current £325,000 allowance should be raised for everyone. 

Other experts, including Sean McCann, chartered financial planner at NFU Mutual, agree a simpler system that people can easily understand is ‘desperately needed’. 

He adds: ‘Even the most recent change, the residence nil rate band, introduced last April to help people pass on more of the value of their family home to their children and grandchildren, is riddled with ifs and buts.’ 

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