Since its introduction in 1986 Inheritance Tax (IHT) rules have evolved considerably so what we now have is a collection of rates, reliefs and exemptions which are not fully fit for purpose. In particular, the qualifying conditions for reliefs and exemptions can be very complex, and the administration of IHT is quite different to that of other taxes meaning only those who regularly deal with IHT are familiar with its detail.
While fewer than 5 per cent of estates are liable to IHT, this figure will rise in line with the large increases in property prices particularly in the south of the country. The introduction of the additional residence nil rate band may partly offset this trend but that again is a perfect example of a relief that simply adds to the complexity of the system. As more and more individuals start to be concerned about IHT liabilities, it is imperative that those individuals are able to understand the basis of the tax; and what their responsibilities and reporting requirements are.
The OTS review will cover not only the technical aspects of IHT but also the administration of the tax. In doing so it must be hoped that consideration will be given to ensuring that the various gift exemptions, such as the annual gift threshold, the marriage exemption and the small gifts exemption which have not kept pace with inflation, are restored to more realistic levels and better meet the requirements of a modern society.
The drive for simplification must also take account of capital and wealth tax regimes in other countries. The resulting IHT regime in the UK must be competitive in comparison with other regimes especially as the recently introduced deemed-domicile rules start to bite for non-UK domiciled individuals living in the UK. From 6 April 2017 non-UK domiciled individuals resident in the UK for a sufficiently long period of time, will be treated as deemed UK domiciled. As a result, all of their assets, income and gains outside the UK will fall within the scope of UK tax. Such individuals might be particularly interested in taking further advice regarding this change to their circumstances even before the results of the simplification are known.
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