Philip Hammond has written to the Office of Tax Simplification (OTS) asking them to put forward proposals for the reform of Inheritance Tax (IHT) “to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible”.
His letter asked the OTS to look at the technical and administrative issues associated with IHT, the process of submitting returns and paying the tax. He also called for a review of the issues surrounding estate planning, and whether the current framework causes ‘distortions’ to taxpayers’ decisions regarding investments and transfers.
The scope of the review will include looking at the current rules surrounding making gifts, including the annual threshold for gifts, and gifts made out of surplus income.
Even the latest change, the residence nil rate band introduced in 2017, designed to help people pass on more of the value of their family home to their children and grandchildren can be complex in its operation, so many families will be relieved at the prospect of simplification.
MORE FAMILIES TURN TO PENSIONS TO AVOID INHERITANCE TAX
The pension reforms introduced in 2015 made it easier to pass unused defined contribution pension assets from one generation to the next. One of the major changes was the removal of the previous 55% tax charge which applied on defined contribution pension savings on death. At the same time, pension savers got the right to pass their pension on to any individual they nominated; previously it could only go to a spouse or dependant.
This has led to more people seeing pensions as a way to cascade wealth to the next generation free from Inheritance Tax. The Telegraph reported earlier this year that an analysis of pension drawdown accounts has shown that £2.1bn was held by those aged under 55. As people need to be aged 55 to move their pension pot into a drawdown account, then it’s reasonable to assume that this figure represents inherited pension wealth.
By contrast, although ISAs can be passed tax-free to a spouse, they could be subject to Inheritance Tax if left to children.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.