Inheritance tax relief ‘no longer fit for purpose’ – Sunak ‘missed opportunity’ for reform

Inheritance tax: Financial advisor provides advice

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HM Treasury yesterday ruled out Inheritance Tax (IHT) relief changes in the Office of Tax Simplification’s first five-year review. The Office of Tax Simplification was commissioned by Chancellor of the Exchequer to review IHT in January 2018.

IHT is predicted to raise £6billion over the coming year, as more and more families are affected by the levy amid rising house prices and the Inheritance Tax threshold freeze.

MP Lucy Frazer penned the response to the Office of Tax Simplification, explaining that the HMRC will be enacting one of the proposed changes from the start of next year. 

From January 1, 2022 that over 90 percent of non-taxpaying estates will not have to complete IHT forms for deaths when probate or confirmation is needed.

The other 11 suggestions put forward by the office in July 2019 included a recommendation to simplify lifetime gift exemptions and change the scope of reliefs for IHT.

The response to the office noted: “There are a wide range of views about how to reform IHT.

“As you acknowledged, the report also raised wider questions about policy issues. 

“As a result, after careful consideration of your recommendations, the Government has decided not to proceed with any changes at the moment.”

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, commented on the missed opportunity for reform: “It’s really disappointing that the Treasury hasn’t taken this opportunity to update the gifting allowances, which are no longer fit for purpose.”

As it currently stands, the annual £3,000 exemption has not been updated since 1981. Had it kept up with inflation, there would be £10,000 leeway via the Annual exemption relief.

Additionally, the small gifts exemption has a similar issue having been frozen since 1980 and wedding gift exemptions have not changed since 1975. 

She continued: “Reducing the length of time it takes for larger gifts to leave the estate from seven to five years was also eminently sensible, as the current system requires too much record keeping, and forward planning. 

“And getting rid of the loophole that means gifts made 14 years ago could end up dragged back into the estate would have avoided some horrible surprises.”

Ms Coles noted that avoiding the changes, whilst not beneficial to those currently dealing with IHT, does help to avoid further complications in a somewhat economically turbulent time. 

While IHT does not appear to be changing anytime soon, Government has approved some minor tweaks to CGT, compromising on the larger changes suggested by the office originally.

Ms Coles commented: “There would have been huge unintended consequences of the proposed CGT changes, because people would have been artificially trapped holding assets they didn’t want.”

Essentially, due to the tax benefits of keeping certain assets until one died would see many investors refusing to part with assets such as properties in order to avoid CGT. 

This would in turn create an even larger struggle for first-time buyers, particularly in the housing market as newly announced scarcity also comes into play. 

Ms Coles concluded: “There’s a very welcome tweak to the rules for divorcing couples though. 

“At the moment, if your divorce crosses into a new tax year, then any assets that you pass between you as a result of the divorce could be subject to CGT. 

“This tweak will mean this is no longer the case, so couples won’t be forced to time proceedings quite so ruthlessly, rush decisions through, or pay the price for delay.”

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