How does this compare to the current system of IHT, and will I pay more or less tax?
Within the current system anyone who dies with assets exceeding the current Nil Rate Band (NRB) of £325,000 is liable for IHT at 40%. However, there are many available exemptions and reliefs which can reduce liability. The most notable for married couples is a complete exemption for gifts made to a spouse, and the ability to transfer any unused NRB to the second spouse to die. There is also a further £150,000 Residential Nil Rate Band available (due to increase to £175,000 in the 2020/21 tax year) if the deceased leaves property to their direct descendants e.g. children or grandchildren. This means that a single person who dies on April 6 this year leaving an estate consisting of the family home valued at £400,000 and other assets totalling £100,000 to their children will have no IHT liability.
There are a myriad of other available exemptions and reliefs such as an annual gift allowance, wedding gifts, agricultural relief, and exemptions for normal expenditure made out of income which can further reduce tax liability but also make for a complex and often confusing inheritance tax system. Couple this with the various different tax forms which need to be completed – even in some cases where there is no IHT to pay – it is unsurprising that the All-Party Parliamentary Group (APPG) who wrote the report have sought to ‘simplify’ the inheritance tax system.
Does a lower tax rate mean less tax?
Due to the currently available exemptions and reliefs available the ‘effective tax rate’ for most estates is often much less than 40%. The new proposals plan to scrap many of these exemptions and reliefs and although there will be a death allowance set to a similar level of the current NRB (available at the point of death only) the Residential NRB would be scrapped. The APPG say this will lead to a fairer system as the very rich will no longer be able to avoid IHT. However, it is not just those with large estates who will pay more tax. Taking our example from above, whereas previously there was no IHT to pay on the £500,000 estate under the new proposals the loss of Residential NRB relief would leave the estate with a tax liability of £17,500.
Lifetime giving will also be affected. Under the current rules any gifts over £3,000 per annum made within 7 years of a person’s death eats into their available NRB, but gifts survived by seven years are free of IHT, making lifetime gifting a commonly used method of IHT planning today. The report proposes to increase the annual allowance to £30,000 but with any gifts over this amount being subject to 10% tax at the time of gifting. As many persons currently use lifetime gifting as their main method of IHT planning, a tax on this lifetime gifting will not be popular.
Another proposal which may cause concern is the plan to scrap the CGT uplift currently available on death. This would mean that rather than inheriting an asset at the market value on the date of death, the beneficiaries of an estate would inherit the property at the value at which the deceased bought it. For many who inherit a property bought by their relatives or friends several years ago there is likely to have been a significant increase in value and these people could face a huge CGT bill when they go to sell the property. The impact of the removal of the CGT uplift will be relevant to all assets, so if, for example, an Executor sells and collects in shares and investments to distribute in accordance with the will, there may well be a much more complex CGT position than there is currently, and a much higher CGT liability. As a result, beneficiaries who would gain from the lower rate of IHT could well lose out on the increased CGT.
Whilst the APPG were only considering taxation upon death on this occasion it is common knowledge there have been many discussions over the exemption for CGT on your home, known as Principal Residence Relief, and there is a body of thought that this relief is very vulnerable to be changed in the near future, and this would impact even further on those inheriting property from relatives or friends if there is no CGT uplift on death.
The APPG’s recommendations are not yet law and there is likely to be further consultations before any decisions are made on whether the inheritance tax system should change. If you need advice about the current system and the inheritance tax position of your estate please contact our Private Client department on 0207 228 0017 or info@hanne.co.uk.
Helen Mead is a trainee solicitor at Hanne & Co.
