The married couples tax allowance could be a ripe target in the forthcoming budget, according to Nimesh Shah, a partner at advisory firm Bick Rothenberg.
He said HMRC data shows the allowance, introduced in 2015, is claimed by fewer than half of those eligible, with around £1.3bn unclaimed.
The allowance is £230 a year, which equates to £4.70 a week. Only married couples where one partner is a basic rate taxpayer and the other earns less than the annual tax allowance are permitted to claim it.
Mr Shah said it is a complex allowance for the tax authorities to administer and to apply for, and the sense he has is that the allowance will be abolished in the budget.
His view is that the cash saved should be used to raise the tax allowance for lower earners.
Gary Smith, chartered financial planner at Tilney, said another recent government tax initiative is also proving ineffective.
He said the main residence nil rate inheritance tax band, which was introduced in April 2017, and means couples can leave £1m to partners and be exempt of inheritance tax as long as the estate includes the equity of a house.
Mr Smith said the complexity of the tax break continues to puzzle his clients.
He said: “Under current rules, a married couple potentially has an allowance of £100,000 each. However, this allowance is only available if you leave your property to a direct descendant, like a child or grandchild, the value of your estate exceeds £650,000 but is less than £2m and you have sufficient equity in your home to use the full allowance.
"The main crux of this tax allowance is that it is only available for equity in the house and not the overall estate.
"For example, if a couple owns a house valued at £500,000 with a mortgage of £375,000, then only £125,000 [the equity] can be used for the IHT calculation and not the £200,000 that a married couple might assume they could claim via their respective allowances.
"They would therefore be losing out on £75,000 of allowance by having the mortgage in place, resulting in potentially £30,000 of inheritance tax. This would be the case even if the individual had life cover in place to repay the mortgage on their death, as the mortgage would have to be declared on the HMRC inheritance tax documents prior to probate being granted.”
He said in the current low interest rate environment many people are choosing not to pay off their mortgage, and so miss out on this tax break.
David.Thorpe@ft.com
