When chancellor Philip Hammond wrote to the Office of Tax Simplification on 19 January, inviting them to carry out a review into the inheritance tax (IHT) regime, my heart leapt.
For too long we have been living with a tax which does not do what it says on the tin. It is not a tax on the inheritances received by a person, but on certain lifetime and death transfers made by a person. Worse, the current effect of the tax is far removed from its original policy intention. Even worse, IHT can be hideously complex, almost capricious, in the way it can catch out unsuspecting families.
When introduced in 1975, the capital transfer tax was intended to tax only the wealthiest individuals. As chancellor, Denis Healey threatened at the time that the aim was to squeeze the rich until their pips squeaked. This policy approach continued when capital transfer tax became inheritance tax in 1986. In the course of the following 32 years, while wealthier families have learned how careful planning can help mitigate or eliminate the effects of IHT, it has become a major worry for ordinary people up and down the UK.
This policy drift coupled with a major shift in the tax base demographic are two of the principal reasons behind repeated calls for a root-and-branch review of the way IHT operates. On the face of it, therefore, the current review should be welcomed and we should be eagerly awaiting publication of the terms of reference. I fear, however, that the reality may be different.
While the chancellor's letter to the OTS was driven by a wish "to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible", he goes on to emphasise that the "review should include a focus on the technical and administrative issues".
Key Points
- The proposed IHT simplification seems to be led by a concern for administrative convenience rather than the desire to overhaul the tax
- The tax, which once fell on the wealthiest families, now often falls on those of average wealth
- Philip Hammond’s request to the OTS was specific about fixing distortions in the terms of the tax
The OTS is well known for its bravery in putting forward dramatic and well-thought-through proposals for reform, but the chancellor’s carefully chosen words suggest that he is encouraging the OTS to think inside the box, not outside it.
Of course, anything which can be done to simplify the tax and its administration would be welcome.
Simpler disclosure
As the scope of IHT has increased, so has its complexity. At the same time, some exemptions such as the annual exemption, the marriage exemption and the small gifts exemption have not kept pace with inflation. The effect of all of this is that many parents worry that, after a lifetime of prudence and careful saving, the taxman may become one of the greatest beneficiaries of their estates on their deaths.
It is often almost impossible to undertake effective IHT planning shortly before a charge on death occurs. But taking action early, and planning for the distribution of assets or maximising the reliefs available, could mean that IHT is fully mitigated and that the next generation benefits from the full value of an estate. Interestingly, the chancellor seems open to the idea of making routine estate planning easier, with simpler disclosure processes.
