Financial advice firm NFU Mutual has called on the next prime minister to simplify inheritance tax (IHT) rules for individuals passing on pensions.
NFU Mutual has called on the various leadership hopefuls to pick up the pace on the "much-needed" reform of the UK’s IHT regime.
In particular, it has called for the next prime minister to remove the uncertainty around the IHT treatment of pensions.
In most circumstances, money left in pensions on death can be passed on free of IHT but if someone transfers their pension while in ill health and then dies within two years the family may receive an unexpected tax bill.
In this instance, HM Revenue & Customs may take the view that the transfer was made primarily to improve the death benefits for the family.
A long-running case on this issue, known as the Staveley case, is to enter the Supreme Court next year, although no official date has been set.
The case involves a woman, Ms Staveley, who, after an acrimonious divorce, transferred a portion of a pension she had set up with her husband into a new pot and bequeathed it to her children. She died a few weeks later.
Because the woman was terminally ill, HMRC treated the transfer as a "chargeable lifetime transfer" followed by an "omission to act" as she did not draw any benefits, and applied IHT.
It argued the two actions were linked and designed to reduce the value of her estate for IHT purposes.
NFU Mutual called for the current system, where IHT is levied on what individuals leave behind, to be replaced with a tax on the recipient.
This would mean each recipient would have a tax-free allowance based on their relationship to the deceased.
For example, a child of the deceased could receive £250,000 from a parent during their lifetime or on death, with a simple sliding scale for other relatives depending on the nature of the relationship. The recipient would then pay tax on any amount above these tax-free limits.
NFU Mutual stated this approach was designed to maximise the available pot to be shared, rather than the current system which effectively cut it off at the source.
Sean McCann, chartered financial planner at NFU Mutual, said: "Simplifying the current system is long overdue. Far too many elements are fiendishly complex and simply impenetrable for most people.
"What we need now is a complete overhaul to embrace common sense and pragmatic changes that deliver real clarity for consumers on the issue."
The adviser also called for the residence nil rate band to be abolished and a simplification of gifting allowances.
The RNRB came into effect in 2017 and is an additional threshold available where the deceased left a residence, or the sale proceeds of a residence, to their direct descendants.
The RNRB for 2019/20 is £150,000, will be increased by £25,000 from 2018/19, and is expected to rise to £175,000 in 2020/21.
The nil rate band, also known as the IHT threshold, is the amount up to which an estate has no IHT to pay. The NRB for 2019/20 is £325,000 and any estate which exceeds this threshold is charged 40 per cent IHT.
Unused NRB and residence nil rate band can be transferred to a surviving spouse or civil partner.
NFU Mutual has called for the RNRB to be abolished as those who do not have children do not get this tax break and complex rules may catch individuals out.
The firm stated: "The current rules also have a number of traps for the unwary - the allowance is reduced if you have an estate worth more than £2m and lost completely at £2.3m, you can lose it if you’ve created certain types of trusts in your will.
"There are also unnecessarily complex rules to negotiate if you downsize your property or move into residential care."
Currently individuals can make gifts that are immediately exempt from IHT even if they die the day after making them, such as gifts on marriage and gifts out of ‘normal expenditure’ but many people aren’t aware of many of these exempt gifts, said NFU Mutual.
The firm stated: "Introducing one simple annual exemption would not only be easier to understand but would encourage the older generation to pass money down earlier, sharing wealth within the family."
Mr McCann said: "For far too long now, IHT rules have been feared by too many and understood by too few.
"Policymakers now have a golden opportunity to address the issue with a bold new approach, which is simpler to understand and administer.
"Reducing the rate from 40 to 30 per cent might also go a long way to shifting perceptions of IHT, which is seen by many as a punitive tax."
A review of IHT rules is currently underway as the Chancellor is keen to simplify the underlying structure of the tax. The first report out last November recommended the government should move to a fully digital system for inheritance tax.
The second section, which will deal with the overall design of the system, is expected to be released in due course.
In April, IHT receipts accounted for £473m, down from £537m in March 2019, showing a decline of 12 per cent.
amy.austin@ft.com
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