The Chancellor, Phillip Hammond, has just announced his intentions to overhaul and simplify inheritance tax and the respective reliefs.
Anyone who has taken an interest in inheritance tax would be well aware of the tortured history of this relief. There are something like 12 more commonly known reliefs available. All of these can impact on how much we can leave. Burt it’s not even as simple as that. For example, did you know:
- If you are married and choose to leave all to your spouse, they will inherit your estate free of inheritance tax, whether you are worth a thousand pounds or a million pounds. But if you are not married, then only the first £325,000 will pass free of inheritance tax.
- But, if you are unmarried, had personal assets worth £325,000 but owned a business valued at for example £675,000 and left your estate to your partner, then its likely in those circumstances your partner would inherit everything free of inheritance tax.
- If you are married, own a house worth £350,000 and personal assets of say £650,000 (conveniently this works out at £1 million) and leave your estate to your children, as a couple you can leave your £1 million free of inheritance tax. Now let’s say together you are still worth £1 million but instead you don’t own property but rent. Here, you can only leave £650,000 free of inheritance tax to the children – the remaining £350,000 is taxed at 40%So in other words, inheritance tax rules penalise those who don’t own property. Contrary to the Conservative party publicity, inheritance tax has not increased to £1 million for everyone.
- And your inheritance tax bill can also take into account any gifts you’ve made to anyone in the past seven years. And that’s not even mentioning other reliefs such as annual, small gift and charity gifts.
So, the take out of all of this is that inheritance tax is a hugely complex tax for anyone to understand, let alone plan for. What you can leave free of inheritance tax, then, is dependent on the nature of the assets you own (personal, a house or business property), the status of the person you are leaving assets to (married or not) and whether you have left gifts to anyone in the previous seven years.
The Office for Tax Simplification has been in existence for a number of years and it has so far drawn a blank in offering simplification around how an estate of someone who has died is calculated. Indeed, one of the most complicated pieces of legislation in inheritance tax was introduced since the OTS was created – the residential mail rate band. See the third example above.
Let’s fervently hope that this time round they do a decent job, strip out complexity, uncertainty and also unfairness and deliver a fair and reasonable inheritance tax regime we can understand and easily apply.