The letter was written by Rachael Griffin, tax and financial planning expert at OMW, part of Quilter, and says the current IHT regime has “numerous legacy clauses and exemptions causing havoc and confusion for those looking to navigate it”.
Nil-rate band changes
The residence nil-rate band (RNRB), when combined with the traditional nil rate band, allows married couples to pass on a family home worth up to £850,000 ($1.08m, €946,872) tax-free.
Under the government’s current plans, the RNRB will be increased each year until 2020, when a married couple will be able to bequest a home worth £1m tax free.
But Griffin says growing housing wealth makes the RNRB “complicated” and it is limited in its use as it is only available for “direct-descendants”.
A simpler solution, Griffin says, would be to increase the standard nil-rate band and to remove the residence nil-rate band.
“It [the nil-rate band] has been £325,000 since 2009. If it had tracked inflation it would stand at £414,000 in 2017, an increase of 27%.
“The nil rate band should be increased to £1m, updating it and removing the necessity for an overly complex RNRB,” Griffin said.
In a response letter from HM Treasury, a spokesperson said the government believes the residence threshold “strikes an appropriate balance” between benefiting most families and ensuring sustainable public finances.
“If we had instead increased the existing threshold in line with inflation, many families would have lost out relative to the current proposals, which by 2020-21 will deliver an effective £1m inheritance tax threshold for many married couples and civil partners.
“Alternatively, increasing the existing threshold from £325,000 to £500,000 would have had significant additional costs to the Exchequer,” HM Treasury said.
Painfully challenging equation
Griffin has responded to the Treasury’s statement, maintaining that the residence nil-rate band is over-complicating the inheritance tax regime.
“Hitting the right balance of reducing tax liability while ensuring financial sustainability is no easy task. However, what cannot be forgotten is the inheritance tax system is incredibly complex and the addition of the residence nil rate band has added another variable to an already painfully challenging equation.
“One of the reasons this allowance does not hit the Treasury’s balance sheet too heavily is because it is heavily restricted. For instance, it omits the close to six million cohabiting couples. It is reassuring that the Treasury says all options are still on the table. There will be a price to pay for simplicity, but it’s value will be exponential,” Griffin said.
Other changes suggested
Griffin suggested four additional changes in the open letter. These were to simplify the annual IHT gifting allowance and trust taxation, change pension rules to encourage life planning and making life and critical insurance policies more effective.
The Treasury did not respond to any of these suggested changes directly in its letter. Instead, it said the Office for Tax Simplification would be considering the suggestions as part of its inheritance tax consultation which ran from 27 April to 8 June.
The consultation report is expected to be published in Autumn this year.