The cycle is all too familiar. Clear policy aims underpin the introduction of a new tax. As the years go by, the tax is changed, perhaps to widen its scope, narrow its focus or address issues which were never thought of when the policy was formulated. Before you know it, what was a clear policy has turned into an administrative mess. The government of the day then invites the Office of Tax Simplification (OTS) to bring order to chaos. New legislation is enacted and the whole process starts all over again.
With inheritance tax, we are at a crucial point. The OTS has a brief to “identify opportunities and develop recommendations for simplifying IHT from both a tax technical and an administrative standpoint.” RSM will be making its recommendations to the OTS in due course. For now, here are three simple recommendations which could make a world of difference.
First, replace the complex patchwork of thresholds, additional thresholds and the residence nil-rate band with a high, single threshold for everybody. To get the debate moving, how about £1 million?
Second, replace the single rate of inheritance tax on a deceased person's estate, currently 40 per cent, with progressive rates. How about 10 per cent, 20 per cent, 30 per cent, 40 per cent and 50 per cent with the latter only applying to that part of a person's taxable estate which exceeded £5 million?
Third, review the way two of the most important reliefs work. These are agricultural property relief and business property relief. They were originally enacted to prevent the break-up of family farms and the sale of family companies which would otherwise be necessary if tax had to be paid on the death of the founder. Without a doubt, there is a continuing need for these reliefs but somewhere along the way they have lost their original focus. Now is the time to review that.
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