As the spring budget on 11 March approaches, there has been a lot of speculation about what the newly appointed chancellor’s plans are, and what the industry actually needs.
Many within the financial advice sector have called for a simplification of pensions relief and for inheritance tax (IHT) to be reformed.
Their calls have been supported by the Office for Tax Simplification (OTS) and an all-party parliamentary group (APPG), which have urged the Treasury to simplify the current rules and systems.
It has been rumoured, however, that the chancellor is considering cutting the IHT rate to as low as 10%, down from the current 40%; and at the same time, reducing the sum of tax-free allowances by setting a £30,000 lifetime gift cap.
Currently, the tax-exempt gifting threshold is £325,000 ($419,546, €375,428), but IHT is due if the individual dies within seven years from making such gift.
Easier to understand
So, what would a drastic overhaul of the inheritance system mean? International Adviser reached out to industry experts on the IA Tax Panel to find out what they think.
Rachel Vahey, senior technical consultant at AJ Bell, said: “Both the OTS and an APPG have called for inheritance tax to be reformed so that it’s much simpler for everyone to understand.
“There are currently a number of different gifting allowances under the IHT rules, as well as potentially exempt transfers and gifts out of excess income.
“A single cap on gifts over a lifetime with a lower IHT rate would be significantly simpler for people to understand and would benefit people who can’t afford the advice needed to take advantage of the allowances and planning opportunities that currently exist.
“However, this would be a significant change and would require detailed consultation and review, so it is unlikely to happen any time soon, even if the chancellor does include this in his budget statement on 11 March,” she added.
Strong ‘winds of change’
According to Rachael Griffin, tax and financial planning expert at Quilter, the industry and its customers have been waiting for a while for some sort of IHT reform, or at least simplification.
“It appears the winds of change are strong too, as report after report have highlighted the long list of the tax’s failings, as well as a series of recommendations.
“Two question marks hover over all these reports, however. Firstly, should IHT be overhauled or reformed? And perhaps, more importantly, what is the purpose of IHT?” asks Griffin.
“The APPG suggests a complete overhaul of inheritance tax and it’s easy to see why. As with most complicated things, it’s easier to just scrap the whole thing and start again.
“Their proposal has the magical ingredient needed by most successful proposals – simplicity. It is easy to follow, and people do not need a law degree to navigate secret clauses.
“The APPG anticipates the reforms would mean most households would remain unaffected by the change and smaller estates would pay nothing.”
Taxing inter-generational wealth
But Griffin argues that there will people who are going to lose out either way.
“Among other things, people will need to think carefully about their lifetime gifting. Under the APPG proposals there will be an annual allowance of £30,000 a year.
“However, we know that many parents and indeed grandparents are looking to pass on their wealth while they are still alive, be it for school fees or to get on the housing ladder.
“And with the generations of today being the first to be worse off then their parents, taxing the flow of the wealth being passed down might not win the government many favours.
“On top of this, under the APPG’s recommendations, everyone will need to declare the gifts over £10,000 even if they are within the allowance.
“While the driver is understandable, to collect better data to review, it seems like just another thing for the taxpayer to keep track of and declare, year after year. And the value of such an endeavour must be strongly considered,” she added.
Griffin said that, originally, the IHT system was straightforward, but has become overly complicated by a plethora of different allowances.
“It became a political plaything to win the favour of voters. If we were to throw the baby out with the bath water and launch an entirely new IHT system, we must be wary the same thing does not happen again,” she warned.
Not just IHT
But RL360’s head of technical services Neil Chadwick says we cannot interpret the reports as representing the chancellor’s intentions.
“The main soundbite is to simplify legislation, but it could actually be a way of bringing more estates into the scope of the tax, albeit at a reduced level,” he said.
“Capital gains tax reliefs have attracted the most attention, but there are many others which are being suggested for the chop, or at least a haircut, such as:
- Lower spouse exemption – currently all assets can pass over tax-free between UK domiciles;
- Nil-rate band to only be available on death, removal of IHT [potentially exempt transfers (PET)] and [chargeable lifetime transfers (CLT)] regimes;
- 10-year IHT charge on discretionary trusts to be replaced by an annual charge;
- UK domicile to no longer be a link to IHT, patterns of UK residence to be used instead, irrespective of domicile;
- All pension funds to be taxed on death unless left to spouse; and,
- Removal of additional residence nil rate band.
Chadwick adds that financial advisers will need time to get their heads around, and then implement, any changes made to the taxation system.
“Whilst the current legislation is complex, it is well understood by those that frequently give advice on it.
“Any changes would have to go out to consultation, and 35 years of tinkering by successive governments would require a lot of unpicking and re-stitching to make sure the legislation didn’t fall apart.
“I’d like to think that any changes would be phased in so that advisers could, where necessary, review any planning that is going to be impacted,” he added.