Inheritance Tax – a political issue
Although it wouldn’t really be fair to suggest that there is any popular form of taxation, Inheritance Tax is one of the types most disliked by the British public. With all its complexities that often come into effect at the worst time both emotionally and financially, people often try to reduce this burden on their loved ones.
Despite all of the current turmoil within the UK Government, estate planning and the resulting Inheritance Tax appear to be hot on the political agenda, with both of the two major political parties recently commissioning their own reports into the system.
What are they saying?
The Labour Party’s Land for the Many report recommends replacing Inheritance Tax with a Lifetime Gifts Tax. At the core of this proposal, they suggest that the liability should fall on the recipient of the gift and not the donor. Each recipient could receive up to £125,000 either during their lifetime or on death, tax-free. Anything received over this amount would be taxed at the recipient’s usual Income Tax rate.
The Office of Tax Simplification’s (OTS) report, commissioned by Chancellor Philip Hammond suggests scrapping the ‘seven year rule’, which has often been seen as the cornerstone of estate planning, in favour of a reduced five-year term, removing taper relief and making significant changes to the existing gift allowances.
It also highlights the potential benefits of taking financial advice:
‘The OTS’s discussions with stakeholders identified an uneven playing field in the Inheritance Tax treatment of distinct types of financial products.
In practice, this can lead to a difference in tax paid between those who have taken advice and the large number of people who have not taken financial advice.’
Tilney has a specialist technical estate planning team that works alongside our financial planners, headed up by Ian Dyall, who was recently given the Outstanding Contribution to Estate Planning award at the 2019 City of London Wealth Management Awards.
Their view on both reports can be summarised as follows:
- We see it as a huge positive that estate planning and Inheritance Tax are on the minds of many of our politicians. This then gives people time to think about their Inheritance Tax planning
- Many of these changes would be welcomed by us, we feel that most of the allowances are outdated. The nil rate band hasn’t been amended since 2009 and the annual allowance of £3,000 hasn’t been changed since 1981
- According to our calculations, only 4.15% of those that died in the 2015/16 tax year paid Inheritance Tax, yet 46.6% of people completed the Inheritance Tax forms. To us, this shows that there is a definite need to overhaul the current system
- We would hope that simplification of the system would lead to an increased understanding of the rules for most people. Once people have a clearer understanding of the potential financial consequences of their actions, they are often more equipped to make informed decisions. The assumptions of the OTS report are based on 3,000 responses to a survey on Inheritance Tax. It would seem likely that many of the respondents have a vested interest in and an understanding of the current system, yet the OTS still concluded that there is a need for simplification. This would suggest that the system is extremely overly complicated
- If history is anything to go by, it will be some time before any of the proposed changes are made, if at all. When Inheritance Tax was changed from its predecessor, Capital Transfer Tax, the legislation was drafted in 1984 but it took until 1986 to implement it. That being said, it’s still important to protect against any potential negative impact sooner rather than later. As with most aspects of financial planning, the sooner you act with estate planning, the more you can do and the less aggressive you may have to be in order to achieve your goals
It is worth remembering these proposals are not definitive changes – they are recommendations which may or may not be adopted, depending upon the political landscape going forward. Overall, we view many of the proposals as positive and would welcome any simplification. The potential timeframes involved would be beneficial as, if you act now, you will have more time to make the most of the changes and your allowances.
New estate planning and Inheritance Tax guides
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This article is based on our understanding of proposed tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief will depend upon individual circumstances. Our opinions may be subject to change.
This article was previously published on Tilney prior to the launch of Evelyn Partners.