‘Complex’ inheritance tax rules face overhaul as Chancellor orders a review of IHT rules
Chancellor Philip Hammond has ordered a revamp of the ‘death tax’ on estates, calling for the complicated inheritance tax system to be made simpler. Earlier this week, Mr Hammond wrote to the Office of Tax Simplification (OTS) requesting a review of the inheritance tax system – in particular, the way payments are made and the way gifts are taxed. He noted that the rules were ‘particularly complex’ and asked for recommendations that would make the system ‘as smooth as possible’ for taxpayers to use.
How much is paid in inheritance tax?
If you pass on money or assets when you die, your heirs may be hit with an inheritance tax (IHT) bill. IHT is generally payable on estates worth more than £325,000 – a threshold which has stayed the same since 2010-2011. This figure is locked in until at least 2019, though there is some speculation that it may be raised in future. You’ll generally need to pay tax at a rate of 40% on anything over £325,000, which can mean a hefty bill (though the rules are different if you’re married, in a civil partnership or are leaving behind a property). According to figures from the ONS, HMRC took £4.8bn in inheritance tax last year – more than double its IHT takings in 2011. This suggests the number of people affected by IHT is steadily growing, possibly as rising home values drive up the size of people’s estates.
You may pay less IHT If you’re leaving property to your child or grandchild, you can pass on an extra £100,000, raising your total tax-free allowance to £425,000. Married couples and civil partners are also able to inherit possessions and assets from one another tax-free. When the surviving spouse passes away, their estate can then take advantage of both their tax-free allowances, as well as anything remaining from their spouse’s allowance. This means you may be able to pass on as much as £650,000 (or £850,000 if it includes your home) if you die after your partner.
There’s no indication that the review ordered by Mr Hammond will affect these thresholds or allowances. You may also be able to lower your inheritance tax bill through gifts or trusts.
Gifts under the IHT rules
You can give away a portion of your estate before dying to bring it under the threshold, but the rules are incredibly complicated. As part of the review, Mr Hammond urged the OTS to consider how the current rules work, and whether they’re affecting people’s decisions around giving away money or investing. Currently, you can make gifts to your spouse or civil partner, or to charity, without incurring inheritance tax. There are a number of other exceptions, including: Gifts to people getting married (limited depending on relationship to couple) Gifts of up to £250 per recipient Gifts that are part of your everyday spending Gifts of up to £3,000 total in each tax year Otherwise, any gifts you make within seven years of your death may be liable for tax. The longer ago you made the gift, the less tax you pay. Currently, tax on gifts is calculated as follows: If the gift was made less than three years before death, no reduction in tax is due If the gift was made three to four years before death, tax is reduced by 20% If the gift was made four to five years before death, tax is reduced by 40% If the gift was made five to six years before death, tax is reduced by 60% If the gift was made six to seven years before death, tax is reduced by 80%. These rules can be difficult to follow, and may mean that your heirs are left to trace back gifts from years before. Mr Hammond singled out this area for review, which may mean changes are likely to be made as a result. Find out more: Inheritance tax planning and tax-free gifts How to pay IHT Currently, your estate must pay your inheritance tax, meaning your heirs must work out what is and isn’t taxable. But if you made gifts within seven years before dying, the people who received those gifts may be liable to pay, which might come as a nasty surprise for many. If they can’t or won’t pay, the amount due comes out of the estate. The balance must be paid within six months of the person’s death. Mr Hammond asked the OTS to consider ‘the technical and administrative issues within IHT, such as the process of submitting returns and paying any tax due.’
This suggests there may be a shake-up to the way payments are worked out and submitted to HMRC.