How does inheritance tax work? Why would any simplification be welcome?
Inheritance tax has been with us since 1986, replacing Capital Transfer Tax regulations. The basic rule is that estates are taxable for inheritance tax when the £325,000 threshold for the personal allowance (known as the 'nil rate band') is exceeded.
What many people do not realise is that there are probably four, arguably five, different types of nil rate band allowances to factor in when considering whether their estate may be taxable to IHT. These range from the ordinary nil rate band as above, to the transferrable nil rate band, the residence nil rate band, the transferrable residence nil rate band and, finally, the downsizing provisions.
In addition, there is a set of rules associated with lifetime gifting and IHT: the annual gift exemption of £3,000, the small gift exemption of £250, and gifting out of surplus income. These exemptions all need to be considered alongside the impact of making gifts within seven years of death, as well as the impact of making gifts but then reserving a benefit.
Add into that the interaction with other taxes, such as capital gains tax and income tax, and the rules surrounding IHT suddenly seem extremely complex.
In response to this complexity, the OTS has been asked to review this. A report is expected in Autumn 2018, which should identify how the area could be simplified both from a technical and administrative perspective.
The areas to be reviewed include:
administrative and practical issues around routine estate planning, compliance and disclosure