UK inheritance Tax to be simplified by UK government

UK inheritance Tax to be simplified by UK government

The current UK inheritance tax system is described by most as confusing, hard to follow and complicated. Inheritance tax (IHT) can catch clients out if they have not put plans in place to secure their assets after they die.

The Chancellor of the Exchequer, Philip Hammond, has conceded that the current rules are “particularly complex” and has asked for a review. While this may not ensure lower tax bills it will hopefully mean a reform of the current system.

UK Inheritance Tax and Expats

What many expats do not know is that UK inheritance tax is based on domicile rather than residence. Therefore, wherever you may go, IHT will follow you and your assets will be liable once you have passed away. It is possible for long term expats to shed their domicile and adopt another, but this takes time and is a very complicated process. Consequently, it is essential that specialist advice and careful planning is taken.

It is also important that expats are made aware of how UK IHT interrelates with the inheritance tax of their resident country. Cross boarder estate planning also requires thorough planning and expats should seek specialist advise, especially if they own have assets in different countries.

IHT Rate and Nil-Rate Band

IHT is currently charged at 40% on your total worldwide estate in excess of the current threshold of £325,000 (possibly £650,000 for couples), this is called the nil-rate. The nil-rate has not seen an increase since April 2000 and is unlikely to change in the near future.

In April 2017 the new Residential Nil Rate Band (RNRB) came into effect. It stated that estates above the basic IHT threshold may be entitled to an ‘additional threshold’ before any IHT becomes due.

What must be noted however is that the RNRB only applies to qualifying residential property and to direct descendants of the deceased. Estates worth over £2 million may receive a smaller amount or nothing at all, depending on the value of the estate.

How Much is the Allowance Under the RNRB?
The value of the qualifying property for RNRB purposes will be its open market value less any liabilities secured on it such as a mortgage.

The additional relief will take effect on deaths on or after the 6th of April 2017 and will be as follows:
• £100,000 in 2017 to 2018
• £125,000 in 2018 to 2019
• £150,000 in 2019 to 2020
• £175,000 in 2020 to 2021

It will then increase in line with the Consumer Prices Index from 2021 to 2022 onwards.

Lifetime Gifts

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. This can be a problem for parents that wish to pass on a sum of money to their children before they die and when their children need it the most.

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 alternatives 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.”

Hammond went on to claim that the current IHT system “causes any distortions to taxpayers’ decisions surrounding transfers, investment and other relevant transactions”.

The OTS has now confirmed that they will be publishing a report in Autumn 2018 addressing the issues raised by Hammond. They hope the report will identify opportunities and develop recommendations for simplifying the tax from both a tax technical and administrative standpoint.

This has been a long time coming for many IHT experts and advisors, but it would be foolish to assume that these changes will result in a reduced tax bill. What these changes will bring is hopefully a more simpler system in which many families will no longer pay IHT that could be mitigated with specialist knowledge.

If you have any queries about IHT please contact us.