• Foxmain Associates

Treasury rules out IHT reform recommendations

The Government has decided not to take on recommendations made by the Office of Tax Simplification (OTS) for inheritance tax.


The OTS Has published a series of reports in recent years with recommendations to make the tax easier to understand and address inequalities.

In 2019, it suggested cutting the period that gifts are eligible to be taxed from seven years to five and proposed abolishing the tapered rate of inheritance tax (IHT).


Where are taxes to be paid, the OTS recommended clarifying the rules on who is liable to pay as well as how the £325,000 threshold is allocated between recipients.


The following year, the OTS suggested a removal of certain release for the tax including one which allows a married couple to pay no levy on the passing of up to £1,000,000 including the family home, due to the combination of personal tax thresholds.


In a letter to the OTS, Lucy Frazer, financial secretary to the Treasury, pointed to the Chancellor's announcement in the Spring Budget that the thresholds at which estates start to pay inheritance tax would be frozen until April 2026, saying this was done to “help rebuild the public finances and fund public services”.


She wrote: “As you recognise, the combination of nil-rate bands, exemptions and reliefs means around 94% of estates are forecast to have no liability over the coming years.”


“However, IHT still makes an important contribution to the public finances, and it is forecast to raise £6 billion in 2021-2022 to help fund public services.”


“As a result, after careful consideration of your recommendations, the Government has decided not to proceed with any changes at the moment, but will bear your very valuable work in mind if the Government considers reform of IHT in the future,” Frazer added.


Overview


Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who's died.


There's normally no inheritance tax to pay if either:

  • The value of your estate is below the £325,000 threshold;

  • You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur Sports Club.

If the estate’s value is below the threshold you'll still need to report it to HMRC.


If you give away your home to your children (including adopted, foster or step children) or grandchildren your threshold can increase to £500,000.


if you're married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner's threshold when you die. this means their threshold can be as much as £1 million.


Inheritance Tax rates


The standard Inheritance Tax rate is 40% it's only charged on the part of your estate that's above the threshold.


Example: - Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of the £175,000.


The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the “net value” to charity in your will.


Reliefs and exemptions


Some gifts you give while you're alive may be taxed after your death. Depending on when you gave the gift, “taper relief” might mean the Inheritance Tax charged on the gift is less than 40%.


Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.


Who pays the tax to the HMRC


Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the “executor”, if there’s a will).


Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.


People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325.000 and die within seven years.


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