Chancellor Sajid Javid opens talk on inheritance tax

At the 2019 Conservative Party Conference, chancellor Sajid Javid has intimated that he may be prepared to scrap inheritance tax (IHT) when asked if he would scrap the ‘death tax’.

Currently, the standard inheritance tax is 40%, in which the individual inheriting the property is charged on the part of the estate above the £325,000 threshold – a figure that generates a huge amount of debate regarding fairness.

A potential change?

The chancellor said: “I shouldn’t say too much now but I understand the arguments against that tax. You pay taxes already through work or through investments and your capital gains in other taxes, there is a real issue with then asking them to, on that income, to pay taxes all over again.”

He finally added: “Sensible changes have already been made but it’s something that’s on my mind.”

The potential move has been met with overall approval by the UK tax sector. Miles Dean, head of International Tax at Andersen Tax UK, responded to the chancellor’s comment by saying: “The chancellor is right to consider scrapping inheritance tax. It is difficult to justify that assets acquired using taxed income are then taxed again on death.

“If it is not abolished, then the threshold should be significantly increased to take account of the fact that the average house price in the U.K. is £233k and that the London average is £478k. It cannot be right that people whose wealth is tied primarily in their own home are often forced to sell the property in order to fund the inheritance tax due on death.

“Reducing the rate to something like 10% over an increased nil rate band threshold could also be a solution, if there were good arguments against abolishing the tax altogether,” he added.

However, the issue of inheritance tax and whether it should be scrapped or not brings out a divided British nation, in which left and right-ring members clash.

Dean said: “Unfortunately, it’s a double-edged sword. Tax is divisive and inheritance tax more so than any other. The Left say inheritance tax should be increased substantially and that there are too many exemptions whilst the Right appear to want to reduce it. The chancellor is therefore damned if he does and damned if he doesn’t.

“The inheritance tax take was £5.4bn last year, this a smallish number in the grand scheme of things. The cost of administering such a complex tax that affects less than 6% of deaths and forces abnormal taxpayer behaviour means it is time for a rethink if not complete overhaul.”

Inheritance tax at its peak

The Chancellor’s statement comes at a time when inheritance tax income for the government has hit its highest level in the UK.

HMRC has recently published an updated version of statistics revealing the amount of Inheritance Tax paid (IHT) in the UK, depending on its regions.

The findings disclosed London and the South East England to be paying the most- with London reaching £1.22bn and the South East region £1.2bn. Most importantly, HMRC revealed all regions have broken the collection record – £5.4bn was collected in 2018/19, compared to £5.3bn in 2017/18.

Boodle Hatfield believes figures are unlikely to drop anytime soon as the latest report published by the Office of Tax Simplification (OTS) was criticised of being very limited.

Kyra Motley, partner at Boodle Hatfield commented: “Each year more estates are caught by the IHT net as reforms have missed the mark.

“The IHT threshold has stood at £325,000 for over a decade, creating substantial so-called fiscal drag and when this is combined with rising property prices, more hard-working middle-class families, who not really regard themselves as being particularly wealthy, are being affected by this tax. There is a strong argument for the Government to seriously consider increasing the threshold.”

She added: “Not only has the threshold remained untouched, but the OTS chose to leave the Residence Nil Rate Band intact despite the confusion that it causes when people are estate planning.

“It is important to start estate planning as early as possible. There are a number of simple reliefs out there, including gifting to children or the use of lifetime gifts – both are effective methods of passing down your wealth to loved ones without the burden of a huge IHT bill.”

In times where UK inhabitants are paying more inheritance tax than ever before, accountants can advise clients on the available procedures for IHT exemption. By doing so, accountancy professionals are able to ensure their clients steer clear of the IHT trap.

Sean Cockburn, director at Mazars, commented: “IHT is a notoriously difficult area of law filled with intricacies and pitfalls.  The compliance and reporting of the tax is not helped by a cumbersome compliance process labelled as complex and old-fashioned in a report from the Office of Tax Simplification this summer. And whilst this report did make a number of recommendations to the Government that would simplify the rules, it remains to be seen whether any of these will be implemented. As the rules stand, it is little wonder why the tax is the source of so much confusion and disputes.”

Reducing IHT payments

In response to the record level of inheritance tax, certain firms offer guidance on reducing IHT payments. If no planning occurs beforehand, inheritance tax can be a big burden, in which individuals can end up passing only 60% of their wealth to family members.

Eugenia Campbell, director and IHT specialist at RSM, said: “The key to IHT savings is to plan well ahead. By taking some very simple actions now significant savings can be made. Your accountant can help you design the best IHT saving strategy for you.”

During these times of uncertainty, accountants can advise clients into taking the right action, depending on their situation. Campbell stated: “As an accountant our role is to bring a sense of perspective to IHT planning. We can guide you through the consequences of each action and how to avoid adverse traps.

Gifts need to be affordable and you should always retain sufficient to live on. IHT efficient investments tend to be riskier, for example start-ups and you might lose your investment. Our role as accountants is not to come up with any artificial arrangements. We aim to help our clients make the most of the reliefs available.”

Cockburn also suggests actions taxpayers can take to avoid such cost, such as lifetime gifts or establishing a trust or family investment company:

“Lifetime gifts will be immediately exempt if they fall within the Annual Allowance (£3,000 pa) or Small gift (£250 pa) exemptions. Those with a large disposable income will want to consider whether they can qualify for the Normal Expenditure out of Income exemption which has no limit.

“For those who don’t wish to make outright gifts, the use of a structure as a Trust or Family Investment Company may be appropriate. This can have the effect of removing wealth from your estate while being able to have control over the assets as well as offering an element of asset protection in the event of a failed business or relationship breakdown.”

Other procedures exist for taxpayers wishing to reduce their IHT, such as considering a pension pot; making a will; investing in IHT efficient investments; or even taking out insurance.