The UK IHT rules are particularly complex. There is hope the system may be made simpler after the chancellor asked for a review.
Updated 9 March 2018
If you struggle to navigate the UK’s Inheritance Tax regime you are not alone. Whether you are setting up your estate planning or sorting out the estate of a departed family member, the system can be hard to follow. Getting your planning wrong may mean your family are faced with unexpected high inheritance tax bills.
Now Chancellor Philip Hammond has acknowledged that the rules are “particularly complex” and has asked for a review. While this will not necessarily mean lower tax bills, hopefully the system will be simplified.
IHT and expatriates
UK inheritance tax (IHT) follows expatriates around the world, since it is based on domicile rather than residence. While long-term expatriates can adopt a ‘domicile of choice’ outside the UK, this takes time and is a complex area, so specialist advice and careful planning are essential. If you do shed your UK domicile, only assets situated in the UK are liable to IHT.
Expatriates should continue to follow changes to the UK IHT rules, and understand how it interacts with the local inheritance tax in their country of residence. Cross-border estate planning can be challenging, particularly if you have assets in different countries or complex family situations.
IHT rate and nil rate band
IHT is charged at 40% on your total worldwide estate in excess of the current threshold of £325,000 (potentially £650,000 for a couple). This nil-rate band has not increased since April 2009.
A new Residential Nil Rate Band (RNRB) came into effect in April 2017: estates above the basic IHT threshold may be entitled to an ‘additional threshold’ before any IHT becomes due. Starting at £100,000 for the 2017/18 tax year, it will increase by £25,000 each year until reaching £175,000 in 2020/21 (after which it will rise in line with inflation). It only applies to qualifying residential property which is left to direct descendants. Estates worth over £2 million receive a smaller allowance or nothing at all, depending on the value.
While a higher threshold is of course welcome, this new ‘family home allowance’ has added extra complication. It has also been criticised for discriminating against those who do not have children or property.
Many people like to give away gifts during their lifetime, when, for example, their children need it most, rather than wait until they die. The rules for lifetime gifts can be even more complex, with the annual exemption frozen at £3,000 since 1981. If it had increased with inflation, it would be close to £10,000.
Any questions? Ask our advisers for help.
Inheritance tax rules to be reviewed
In January Chancellor Philip Hammond wrote to the Treasury’s Office of Tax Simplification (OTS) asking them to investigate options for the reform of IHT:
“Inheritance tax, and the system within which it operates, is particularly complex and I would like to request that the OTS carry out a review. 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.”
The letter goes on to suggest that the OTS look at how the current gift rules interact with the wider IHT system and if the current system “causes any distortions to taxpayers’ decisions surrounding transfers, investment and other relevant transactions”.
The OTS has since confirmed that it will carry out a review of a range of aspects of IHT and how it functions today. The overall aim is to identify opportunities and develop recommendations for simplifying the tax from both a tax technical and administrative standpoint. It will publish a report in the autumn of 2018.
For many tax practitioners and wealth management advisers, this review is long overdue. Besides the taxation of gifts and the new RNRB, the IHT regime for trusts can be a minefield.
It is still early days, so we now have to wait and see, and hope, that the system will be improved. However, we need to be realistic and not expect this review to result in much lower inheritance tax bills.
IHT is a good earner for the government. Receipts for the 2016/17 tax year hit a record high of £4.84 billion – more than double 2009/10’s revenue. Documents released with the November 2017 budget showed that would increase to over £5 billion by the end of the year. HM Treasury expects to raise £5.3 billion in 2017/18 and £6.5 billion by 2022/23 – despite reducing tax on family homes.
All this illustrates how important it is to take professional advice for your estate planning, if you want to make sure you are up to date on the rules, are navigating them correctly, and shielding your family from paying any more tax than they absolutely have to. Too many families pay inheritance tax that could have been mitigated with specialist knowledge and careful planning. Don’t let this happen to your family.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.