Inheritance Tax Where It Might Go?

Firms such as ours involved in Probate Administration, Estate Administration and planning, have been thinking as to how the Government may seek to recover monies in tax, owing to the vast amount that it has had to pay in order to protect the economy in these pandemic times.

Whatever it chooses to do, the recovery of these monies will have to be through taxes to everybody, and one of these taxes that the Government may look at, and believe they will look at, is the Inheritance Tax Provisions.

A number of the provisions that relate to the Inheritance Tax, have in effect not changed for the past decade. But generally people who have to pay inheritance tax, or families who have to pay Inheritance Tax, have become wealthier, and the situation arises that a number of people who would not have been caught, have been caught, and principally because the value of their properties have now risen to a situation where they are caught by the current rules, and will be caught by future rules.

Therefore this article is simply an article as to where the Government might go in revisiting Inheritance Tax. The situation before the pandemic was that Inheritance Tax was one other tax, as all others are frankly, that the Government would look at, and suggested that in particular Inheritance Tax should in fact be simplified, and there has been consultation as to the major shake up of the Inheritance rules, and some critics say that the reforms are needed on a much wider scale than those being proposed before the pandemic hit. As indicated with the pandemic and its effect on the economy, we suspect the Government and their advisors will look to IHT to be changed to bolster the Governments coffers.

We propose a series of articles, which is simply our opinion of what may happen in the future.

Inheritance Tax is theoretically charged at 40% on the value of an individual’s estate above £325,000.

In essence this is a voluntarily tax, as it does not come from earnings or profit.

Although not one of the largest incomes for any UK Government, the UK’s annual 5 billion plus IHT bill is welcome income.

Inheritance Tax laws are complex, often baffling families and executors when they struggle with the bereavement.

One of the surprises that may come to executors and families, is that the rules state that Inheritance Tax must be paid before a Grant of Representation is issued, and there are complex rules that allow negotiations to take place if this cannot be met from the estate, but that again is not part of this article.

In our view, critical what has been happening for sometime now, is the rising property prices, coupled with the fact that IHT thresh-hold has been frozen for a decade, meaning more people are being caught by the tax.

Government receipts for 2018-2019 were the highest on record, and only 5% of the estates have duties to pay, but ten times as many have to submit lengthy tax forms, which often require professional advice.

There has been on going discussions regarding the Inheritance Tax, as generally the professionals involved in this type of work, and the Government, have accepted that the Inheritance Tax should be simplified. Indeed the Government have been in discussions with the Office of Tax Simplification (OTE) a statutory body, to review the tax well before the pandemic hit.

We believe it’s a generally held principal that the best way of reducing IHT bills is to give the money away while a person is alive.

This is generally what is known as a ‘Potentially Exempt Transfer’ or PET. Regardless of the size of the gift, there is currently a provision that no IHT will be paid if it is made seven years before a person’s death.

Gifts are ‘potentially’ exempt, as if the giver dies before the seven years is up, IHT could be charged, and although in some cases the amount can be tapered down after three years.

In consultation with the OTS office, there was a suggestion and recommendation, that the years available to people should be reduced from seven years to five. It also suggested scrapping the taper allowance, which it found was widely misunderstood. There was also a suggestion that the ‘fourteen – year rule’ that affects those who have used trusts, should also be scrapped.

As anybody involved with the administration of estates in such circumstances will testify, it is often a struggle to prove the gifts were exempt, noting that bank statements are often the only available information and they traditionally were only available for the past six years.

Its our view that if tax simplification is going to come into effect, that amongst many other aspects under the inheritance provisions, this particular rule will be substantially changed, to impact on the availability of persons to avoid IHT during their lifetime.

As we said at the beginning of this article, the Government is going to have to find the money to repay the expenditure on the current Covid payments.

Although small by comparison to other tax income, we have no doubt that Inheritance Tax will be targeted, and will mean that families will have to pay more IHT in the future.

If you have issues please do not hesitate to contact us.