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As Inheritance Tax Receipts Hit New Record High, Is Reform Coming?

Gresham Wealth

According to the latest figures, Her Majesty’s Revenue and Customs (HMRC) collected £5.2 billion in inheritance tax in the last financial year (2017-18). This record sum of receipts is despite the introduction of the main residence allowance, which began being phased in at the start of April 2017 at a level of £100,000.

The main reason behind the increase in IHT collections is the sharp increase in property prices over the last decade or so. With the main threshold for IHT having stayed at the same level of £325,000 per individual since April 2009, many more people and their estates now fall into the taxable bracket.

It is perhaps therefore not surprising that the current Inheritance Tax regime is under consultation. Launched in April 2018, the Office of Tax Simplification will investigate whether the current system is fit for purpose.

Set to report back in time for the autumn Budget, the consultation will consider the “user experience” of the IHT system as well as the complexity of the legislation itself.

The Current System

Under current legislation, individuals can leave up to £325,000 of wealth to their loved ones without incurring any tax. Anything above that amount is taxed at 40 per cent. The IHT threshold is double the amount for married couples/civil partners, who between them can pass on up to £650,000 to their beneficiaries before incurring any tax.

In April 2017, an additional allowance known as the Residence Nil Rate Band (RNRB) was introduced for those with direct descendants. Starting at a level of £100,000 per person in 2017/18, the additional inheritance tax allowance can be used against the net value of a family home or former main residence. Set to increase each year thereafter until 2020 – to £125,000 in 2018/19 (the current level), to £150,000 in 2019/20 and to £175,000 in 2020/21. In theory therefore, a married couple will have an overall allowance applicable to their combined estates of up to £1 million by the start of the financial year in 2020 (the £1 million figure assumes there is a qualifying property in the estate worth at least £350,000 in 2020/21 and that neither estate exceeds £2 million).

Although this new allowance brings many more individuals and couples underneath the inheritance tax threshold, the introduction of the RNRB has arguably made the rules even more complex.

The fairness of this rule has also been called into question as it only applies to those with ‘direct descendants’, leaving those who do not have children with only the main inheritance tax allowance.

The calculation of an estate for Inheritance Tax purposes includes the value of any properties owned (over and above the Main Residence Allowance, if this applies), cash savings, investments, car, jewellery and other valuables, minus any liabilities, such as an outstanding mortgage.

The Issues with the Current System

The first complaint regarding the current system is around the practical issues surrounding the process of submitting inheritance tax forms. Despite the fact that inheritance tax will only be paid on 5% of deaths, many more individuals will be required to go through the process of filling in and submitting forms. The process can be long and complicated and can sometimes require incurring large professional advisory fees from the likes of solicitors and estate agents.

The second cause for concern is the way in which the rules may unduly influence people’s decision making process regarding their finances. Due to the nuances in the rules, particularly around gifting and now the RNRB, many suggest that the current system encourages individuals and couples to make decisions driven by attempting to mitigate inheritance tax rather than making a free choice.

The various IHT reliefs e.g. those for businesses, farming businesses and charitable giving, plus current gifting rules that enable families to legitimately mitigate their final tax liability by passing on wealth while they are still alive, or via investments in IHT exempt AIM shares when held for the 2 year qualifying period, may also be called for review.

It will be interesting to see what recommendations the Office of Tax Simplification will make. Clearly there is room to make the inheritance tax system fairer and less complex, and many hope that the call for review by the Chancellor could be a sign of intent for future reform.

We’ll be watching this one very closely and will be sure to report on any developments as and when they happen.

Balancing Act

As with any aspect of financial planning, Inheritance Tax planning needs to be considered alongside the other things you wish to achieve with your wealth, as well as additional factors such as your lifestyle and living arrangements. For these reasons, Inheritance Tax planning can be particularly complex and as such, specialist advice from an independent financial adviser should be sought if your estate is close to, or falls over the current threshold levels.

For advice tailored to your individual circumstances, please contact us to arrange to speak to one of our Chartered Financial Advisers.


The Financial Conduct Authority does not regulate Inheritance Tax or estate planning.

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