The Office of Tax Simplification (OTS) has recognised this, and earlier this year asked the public for views on the practical problems faced when administering estates, and calculating and paying inheritance tax.
In response to the call, the Association of Accounting Technicians (AAT) has identified some interesting points:
- Inheritance tax receipts raised a record high £5.3 billion in the year to February 2018. Despite this, inheritance tax is paid for in only 4% of estates.
- A grant of probate can only be obtained once inheritance tax has been paid, which means that personal representatives are often restricted from using estate assets to pay the inheritance tax bill. This can cause cash flow problems for executors.
- The residence nil rate band allowance (RNRB) has been widely criticized for being far too complicated. The recommendation from AAT is that the new allowance should be merged with the existing nil rate band allowance (the tax-free allowance), effectively increasing the nil rate band for all estates.
- The schemes for business property relief and agricultural property relief need to be revised so that they can no longer be exploited for tax reasons by those who do not genuinely own a business, or who are not farmers. These schemes cost the taxpayer over £1 billion annually.
- The exemption that allows shares in certain AIM-listed companies to be exempt from inheritance tax should be reconsidered. In the view of AAT, this exemption provides unjustifiable tax avoidance and the unintentional promotion of AIM-listed companies.
- More than half of those who die in the UK fail to make a will, and of those who do, only 6.2% leave a will that contains a gift to charity. Bearing in mind that only 4% of estates are taxable, AAT believes that the charitable exemption is an unnecessary complexity that adds little, if any, value and should be scrapped.
- Given the average UK house price and the value of the average UK family's savings and investments, the nil rate band allowance should remain at the current level, (£325,000 for individuals or up to £650,000 combined allowance for married couples/civil partners) particularly in light of the implementation of the RNRB.
It is important to note that these are the views of AAT and are not necessarily shared by other professionals.
The government's acknowledgement of the complexities of inheritance tax is the first step towards change. It remains to be seen whether the result will be a wholesale change, including scrapping the current system, as suggested by some, or something less radical. Certainly some changes to the current system appear likely. The OTS report is due to be published this autumn.
If your estate is over the tax-free threshold, it is important to review this with your adviser to maximise possible tax-savings. Our expert team of advisers will be happy to help. For more information, please contact Mary McCrorie in our Private Client team on 0117 314 5368.