Inheritance TaxFeb 25 2020

Chancellor urged to scrap 'complex' IHT rule

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Chancellor urged to scrap 'complex' IHT rule

Chancellor of the exchequer Rishi Sunak has been urged to scrap the complex residence nil rate band and replace it with an equivalent increase in the nil rate band.

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 in IHT.

Unused NRB and residence nil rate band can be transferred to a surviving spouse or civil partner.

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, an increase of £25,000 from 2018/19.

But WAY Investment Services is calling on the chancellor to scrap the RNRB in his March Budget, saying it has created a number of anomalies that mean it is not available to everyone and only added further complexity to an already complex system.

The RNRB is only available for people who want to pass the family home on to direct descendants, so those without children who wish to pass it on to nieces or nephews are unable to benefit.

The rules on downsizing are also complicated as when the RNRB was introduced the government passed a rule so that people who had downsized on or after July 8, 2015 would still be able to make use of the RNRB with respect to the value of their previous property. 

However, anyone moving before that cut-off date would not benefit.

John Humphreys, inheritance tax specialist at WAY Investment Services, said scrapping the RNRB and instead increasing the NRB could solve these issues.

Mr Humphreys said: “It would have been far more straightforward simply to have increased the nil rate band (which has been frozen since 2009), rather than have two separate nil rate bands that are subject to two completely different set of rules. 

“Bearing in mind the recommendations of the All-Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness, we would urge the government to take the opportunity to make sensible reforms to the IHT regime, and get rid of the RNRB and replace it with the same incremental steps in the main NRB, which everyone receives, thereby instantly removing the unfairness created by the introduction of the RNRB.”

A review of IHT rules was carried out in order to simplify the system. 

The first report from the Office of Tax Simplification (OTS), out November 2018, recommended the government should move to a fully digital system for IHT.

A final report, published July 5, was more wide-ranging and proposed a change to the ‘seven-year rule’ of taxing gifts alongside changes to the taper relief and others.

Rachael Griffin, tax and financial planning expert at Quilter, agreed the RNRB needs simplifying but stopped short of claiming it should be scrapped entirely saying it does come with some benefits.

Ms Griffin said: “The main RNRB was a prime area for simplification. The recent OTS report highlighted that even some solicitors choose not to advise clients on it due to its complexity.

“The report also notes that the RNRB was [the] most common topic of correspondence that the OTS received. They found that the rules place certain groups at a disadvantage including those who don’t have children, elderly siblings who live and own a home together and those that don’t own a home. 

“The OTS to some extent wipes its hands of all this saying it is not an issue of simplification, but one of policy. But these issues can’t be ignored and provide further rationale for reform.”

She added: “However, while convoluted, the rationale behind the RNRB was that people wanted to pass their homes onto the next generations. Scrapping the allowance and not replacing it with anything else will stem the flow of wealth between the generations. 

“Something people will want to think twice about as the younger generations are set to be worse off than those before them.

“Increasing the NRB seems like a sensible decision, but the level of that increase will be important so it balances cost to the government and benefit to the right people.”

amy.austin@ft.com

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