A convoluted and outdated set of rules governing inheritance tax should be simplified, for the sake of fairness, writes Stuart Smyth
One could be forgiven for thinking that the UK’s domestic agenda has taken a back seat, if it ever even made it onto the bus in the first place, over the last 18 – 24 months, it's something to do with an ongoing negotiation by all accounts. But fear not – the wheels of government are still turning quietly in the background, evidenced by the Government (through the Office of Tax Simplification) issuing a review on simplifying the Inheritance Tax (IHT) regime.
While unfortunately, such a review is unlikely to feature on the agenda of many of the UK’s population in general albeit it being open to the public, it has been welcomed by industry stakeholders instead. For businesses especially, it is widely accepted that the UK IHT regime has become a heinously complex and crowded landscape which can produce unpredictable and unfair results. Accordingly, my firm and other industry representative stakeholders have taken the opportunity to contribute.
One such contributor was the Law Society which has suggested that a number of areas were ripe for ‘simplification'. A proposition to increase in the standard Nil Rate Band to replace the Residence Nil Rate Band (RNRB) is an example, as the latter is an outdated policy introduced to lift people out of the IHT net, which many had found themselves in solely due to the rise in house prices in 2017. However, the RNRB discriminates against those who do not have a house, children or remoter descendants as well as unmarried co-habitees. Additionally, you wouldn’t wish an analysis of the downsizing provisions on your worst enemy. In the meantime, the standard Nil Rate Band has been fixed at £325,000 since April 2009. It would be much simpler, the Law Society suggests, if the standard Nil Rate Band is increased and the RNRB scrapped altogether.
Another area which needs attention is tax relief – Business Property Relief and Agricultural Property Relief are very valuable instruments which at present are prime targets for increasing tax revenue. However, the Law Society advocates that the reliefs should be left alone and should continue to be used to protect genuine commercial businesses and farms from being broken up due to the death of an owner. Only small simplifications to remove inconsistencies such as the denial of BPR on furnished holiday lets should be addressed.
There should be more focus around the rules governing gifting, too. The Annual Exemption Amount (currently £3,000 per annum) for lifetime gifts could be increased to a larger sum of say £10,000.This would mean exemptions for small gifts, gifts in consideration of marriage etc. could be dispensed with thereby requiring only one set of rules to be remembered and monitored.
Lastly, the mounting regulatory paperwork should be alleviated, in a systematic way. The compliance burden is gradually increasing with even simple estates facing IHT returns of up to 40 to 50 pages. Additionally, the IHT regime for trusts imposes extremely complicated and time consuming calculations which generally produce very small amounts of tax for the Revenue. The Law Society propose a more streamlined process to IHT returns by using online automation.
A simplification of a number of areas in the IHT landscape is certainly much needed and the suggestions proposed by the Law Society would make for a sensible first step. I think that a complete overhaul of the regime is also required and would merit a much more thorough and in-depth consultation and should no doubt be delayed until after Brexit or whatever happens when the negotiations come to an end.
Stuart Smyth is an associate at boutique private client law firm Maurice Turnor Gardner LLP