In Focus: Tax  

IHT regime is outdated and in serious need of an overhaul

Inheritance tax planning is in desperate need of an overhaul, specialists have claimed. 

Edward Grant, director responsible for professional development at St James's Place, said not only is IHT an 'emotive' tax, but it is also 'completely outdated' and in urgent need of an overhaul.

Speaking on the FTAdviser In Focus podcast, Grant said: "A lot of the allowances and exemptions in relation to IHT came in during the 1980s.

"For example, the £3,000 annual lifetime allowance came in during 1981 and hasn't changed since."

If it had increased in line with inflation, he said, the allowance would now be at approximately £11,900. "It's fair to say that, in terms of IHT, it has not been updated and more and more people are coming into the scope of IHT."

Grant added that Covid-19 will have also seen more people being affected by IHT - something they might not have planned for, perhaps, which is making it even more important for IHT to undergo a reform.

Fellow podcast panellist Nick Bird, business development manager for Octopus Investment, addressed the Office for Tax Simplification's review of IHT in 2018-2019, and the findings of this, which included the revelation that people just did not understand IHT.  

Bird said: "Another thing that came out [of that review] was about the process. During a stressful period in someone's life they do not want the additional stress of filling out forms.

"So some structural changes around the administration of IHT would benefit many people", he added. 

He also pointed to more people being caught up in the scope of IHT. While the mass affluent have traditionally been affected by this, the "changing nature" of things such as house prices have pushed more people up into the higher-net worth brackets, far above the £325,000 IHT threshold.

Kyra Motley, partner at Boodle Hatfield, agreed with this. She said: "Only between 3-5 per cent of estates in the UK actually pay IHT" but warned that, as house prices continue to rise, more and more people are being caught up in IHT.

"When it was introduced in 1986 it was designed to be a tax on the wealthy; it is now a tax on Middle England", she told listeners.

She said she welcomed the introduction of the residential nil-rate band in 2017, which gave people an additional amount of allowance when they leave their property to direct descendants, but said there was more to be done.

Motley believes there was a huge opportunity for the government to make changes to the IHT regime to bring green investments within its scope. 

This, Motley said, would bring more revenue in as people are increasingly looking for tax-efficient ways to invest according to their environmental, social and governance values. 

"If you ask how out-of-touch the legislation is, it is out-of-date in so many ways. It is a tax that could be used to encourage investment in so many areas where you could get an exemption from IHT (such as business property relief and agricultural reliefs.

"People want to invest in assets that qualify, so their estates do not pay IHT, and those two reliefs alone were worth £3.5bn in 2018, so there is some scope as we look at how the world is changing, to expand on this and transform IHT."

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