Tax is always a political football. A tweak here or there can favour one group over another. Inheritance tax (IHT) is a case in point. It’s very emotive and people get awfully exercised about it.
That’s a bit odd because only about 8% of estates pay any IHT, which amounts to about 45,000 families. But the psychological effect, the so-called unfairness of IHT, is much, much wider.
But is it really unfair?
IHT is a tax on capital, and the value of a person’s capital has a lot more to do with general economic conditions than their own innate ability. For example, the rise in house prices is nearly entirely due to the lack of house building, not our individual skill at buying a property that appreciates.
We’ve all lived with the conditions that has produced this wealth for some but not others. Therefore, is it really beyond the pale that the top 8% or so make a contribution to the government coffers for the benefit of everyone?
Before you answer that bear in mind that IHT is as close to a voluntary tax as you can get. There are plenty of things that can be done to mitigate its effect. Sure, each of those things come with compromises but how much cake and eating it should a person reasonably expect?
IHT has existed in the UK for over 300 years, and it’s not going anywhere soon. In its current form, it was brought in to replace the old Capital Transfer Tax; a measure that was brought in itself as a form of wealth distribution in order to regulate disparity between rich and poor.
Although in concept the idea is quite simple, in reality, the caveats and bureaucracy surrounding it in its present form can make it difficult to get your head around. In fact, this January, Chancellor Philip Hammond called the current system “particularly complex” and appealed to the Office for Tax Simplification (OTS) to hold a review of it.
In his communication with them he stated: “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.”
As it stands, in 2018 the IHT allowance remains at £325,000, as it has done since 2010, with no plans to increase it. For those who qualify however, the Residence Nil Rate Band Allowance (RNRB) raises the threshold by £125,000 – this is planned to increase by £25,000 a year for the next two tax years, meaning that in 2020/21 the RNRB will stand at £175,000.
The IHT rate itself is firmly at 40% for anything above the £325,000 threshold, however if 10% of an estate is left to charity, the rate is adjusted to 36%. Even with these limited examples, the complexity of the issue is abundantly clear.
The possibility of simplifying IHT is definitely there – it all comes down to the will of the treasury.
In fact, in April of 2018, the OTS declared that it would “identify simplification opportunities” and made a request for feedback from those with personal experience of IHT. We can be confident that there will at least be a review of things such as the taxation of trusts, the RNRB allowance and exemptions and reliefs for things such as business and agricultural property.
Simplification could ultimately lead to the system being replaced entirely, but reforms leading to increased taxes would likely prove politically unpopular under the current government. Only time will tell whether or not we see changes in the near future, but the changes are certainly feasible.
In the beginning IHT was simple to understand and replaced the very complicated Capital Transfer Tax. Successive governments fiddled around with to favour various people and today it is a mess. And so, it looks like we may go full circle and come up with a new simple regime.