Chancellor Sajid Javid confirmed that curbing death duties was on his mind, after Housing Secretary Robert Jenrick backed a cut to Inheritance Tax (IHT) dubbing it as unfair that people were paying tax twice.
Changes to IHT have not kept pace with the increase in property prices over recent years, which has resulted in many more estates being subject to IHT than there were in 2009. It is estimated that house prices have increased by approximately 30% in the last ten years, whilst the IHT threshold has stayed at £325,000 since 6 April 2009. The current rules are that when an individual dies, everything over £325,000 is taxed at 40% or, for married couples who die leaving everything on first death to each other, everything over £650,000 is taxed at 40% on second death.
The Residence Nil Rate Band (RNRB) was introduced by David Cameron’s Government which saw an additional IHT allowance being introduced but this was only available to those who leave their residence to their direct descendants, therefore excluding those who cannot have or do not want to have children, and excluding those who cannot or do not want to own property.
Bringing the IHT allowances in line with inflation since 2009 would be one welcome reform, but there are other reforms too, particularly bearing in mind the change in society over the last ten years. For instance, transfers between cohabitants do not benefit from any exemption from IHT, meaning IHT is payable on the death of an individual, even if they leave their estate to their partner. There is often a misconception that ‘common law husbands and wives’ mean that a partner would benefit by operation of law, which is incorrect. In addition, if someone dies without leaving a Will, so that the intestacy rules apply, cohabitants will not benefit . The intestacy rules only benefit bloodline members of the family or spouses / civil partners, which could potentially leave your partner unable to continue living in your property or without any entitlement to assets in your estate.
The Office for Tax Simplification reported suggestions on how to simplify the IHT system earlier this year here which makes some measured proposals but, equally, some of the proposals seem to give with one hand, but take with the other, with the introduction of a lifetime gift allowance, thereby limiting what you can give away during your lifetime (whereas under the current rules, there is no limit).
Currently, there is due to be a Budget on 6 November. Time will tell whether that Budget will be the start of an overhaul of our outdated IHT rules and allowances.
For more information about IHT planning, please contact a member of the tax planning team.
