Resolution Foundation, the think-tank, has recommended that the current Inheritance Tax (IHT) regime is scrapped and replaced with “one that is fairer to families and harder to avoid”; specifically, a “Lifetime Receipts Tax”.
Adam Corlett, their Senior Economic Analyst, said; “the current system of Inheritance Tax is not fit to deal with this societal shift [of wealth]. It currently manages the uniquely bad twin feat of being both wildly unpopular and raising very little revenue.”
How Inheritance Tax works
There are currently two types of Nil-Rate Band (thresholds up to which IHT is exempt), after which an individual’s estate (property, cash, possessions and investments) is taxed at 40% upon death:
- The Nil-Rate Band (NRB) at £325,000, which will remain at this level until the end of 2020/2021. Bear in mind it hasn’t changed since 2009, during which time estate values have increased significantly.
- The Residence Nil-Rate Band (RNRB), which is currently £125,000. Intended to reduce the burden of IHT by making it easier to pass the family home to direct descendants, the RNRB is making a pretty poor attempt at playing ‘catch up’ to property prices to mitigate tax, especially in the South East. That said, it is set to increase annually by £25,000, but only up to £175,000 in 2020/21 where it will increase in line with Consumer Prices Index thereafter (just 2.3% p.a. at the time of writing).
Effectively then, the current maximum IHT threshold is £450,000 per person. For married couples and those in a civil partnership, when the first person dies their allowance can be passed to the survivor, meaning a total exemption of up to £900,000. However, for those with estates worth more than £2 million the RNRB allowance is tapered away by £1 for every £2 above. As a result, when the RNRB reaches £175,000 in 2020/21, anyone with an estate over £2.35 million will not benefit from it.
Why suggest a replacement?
IHT really isn’t very popular… a 2015 YouGov Poll named the tax as the least ‘fair’ of all 11 major UK taxes, with almost 60% of people agreeing. Public perception aside; for HMRC it does a spectacularly bad job of raising revenue, accounting for less than 0.8% of income nationally.
The Resolution Foundation agree, naturally, that “despite its limited revenue raising ability, it is regarded as Britain’s least fair tax…. due in part to it being perceived as a tax on the dead, having a high marginal rate of 40 per cent, and because it is often seen as merely a voluntary tax for the very rich and well advised”. We would stress that being ‘well advised’ is available to everyone…
Inheritance Tax planning
If you are yet to address your estate’s potential liability, amongst other methods, it may be mitigated with the use of:
- Making cash gifts at least seven years before death
- Making gifts using the ‘normal expenditure out of income’ exemption (therefore not having to be seven years before death)
- Insuring against the potential liability
- AIM portfolios (UK ‘Alternative Investment Market’ funds)
- Utilising Business Property Relief
- Buying agricultural land
Often wealth is tied up in property, which is possible to be gifted in order to minimise IHT in some circumstances, but passing ownership during your lifetime comes with its own complications and considerations. In any case, if you would like some IHT advice, we have a wealth of tax planning expertise and experience.
The proposal: Lifetime Receipts Tax
The move to a lifetime tax assessed on the recipient, which is similar to France and Ireland at the moment would, in the eyes of the Resolution Foundation, be fairer and raise more revenue at lower rates than the current system.
In their proposition, individuals would have to keep track of cumulative receipts. £3,000 of gifts from a single donor to a single recipient would be exempt of tax each year, as would gifts between spouses or to charities. Beyond this, recipients would have a lifetime allowance of £125,000; between this figure and £500,000, there would be a basic tax rate of 20%. Above £500,000 and a top rate of 30% would be charged.
What could this mean?
Despite lower marginal rates, the think-tank suggests their proposal would raise £4.8 billion more than Inheritance Tax is projected to in 2020/21. Ultimately, the suggestion has been made to increase revenue, by predominantly penalising higher net worth individuals making use of current exemptions.
It would mean farewell to both the seven year cumulative gifting rule and the normal expenditure out of income exemption, removing many of the tax planning opportunities currently available.
The likelihood of it happening? Whilst UK chancellor Philp Hammond had earlier this year ordered a review of IHT to ensure it remains fit for purpose, at this stage, it is important to remember this proposition is very far removed from Government policy, though it is indicative of the direction of thinking. Clients who are keen to pass a legacy to their children may wish to consider expediting plans to gift assets whilst the 7 years gifting rules still apply and whilst you can give away surplus income with no time limit so long as it is ‘habitual’. This is understood to mean regular in nature and it is has been suggested that HMRC would need at least 3 years of donations as a record to establish a pattern that is ‘habitual’ unless any paperwork associated with a gift is clear about future intent.
If you have any Inheritance Tax concerns, questions or would simply like to organise your estate in the most tax efficient way possible, do not hesitate to get in touch.