Inheritance tax (IHT) is criticised for being outdated and unfair, and even the UK Government wants to make it ’simpler, fairer and better’. What can you do to manage it?
The Government collects more and more of it each year – a record £5.4 billion in 2018/2019 – IHT also puts a heavy bureaucratic burden on families and executors. Although only 25,000 or so estates pay IHT each year, over ten times that number have to complete lengthy tax forms.
The Office of Tax Simplification (OTS) has recently published a number of proposals for simplifying IHT (see below). But, for the moment, these are recommendations only. They may take years to happen, or not happen at all, so don’t plan your estate around them.
The OTS changes may or may not materialise, but that doesn’t mean that the rules on IHT, and its application, are static. IHT is subject to a steady stream of court cases and rulings, any of which could turn out to be relevant to your own estate and IHT planning.
So, what does all this mean in practice for individuals and their families? We’d suggest following three golden rules:
- plan – with a tax charged at 40%, you don’t just hope for the best
- take advice early on
- and take it again at regular intervals, in case anything has changed. With luck, it will have changed for the better, but don’t bet on it!
What is inheritance tax?
- IHT is paid on estates worth over £325,000, and charged at 40% on the value above that.
- It is mostly paid from the estate, not by individuals who inherit.
- There are many reliefs and exemptions, but using them requires careful planning.
How could IHT be simplified?
Among the changes suggested by the Office of Tax Simplification (OTS) were:
- Changing the ‘seven-year rule’: currently, gifts made less than seven years before death may be subject to IHT. The OTS proposes dropping this to five years.
- Simplifying the IHT exemptions for annual gifts and gifts out of normal income.
- Reviewing the interaction of IHTand capital gains tax.
- Looking at the IHT rules relating to businesses and farms.
- Most changes suggested by the OTS have been well received; however, some people were disappointed that the OTS was asked to simplify the existing rules, rather than overhaul the system.
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