Inheritance Tax  

IHT under Hammond's gaze

IHT under Hammond's gaze

Inheritance tax (IHT) has a long and complex history stretching back to 1694 when a probate duty was introduced in a fixed stamp tax on the personal property in wills. A century later came the 1796 tax on estates, which helped to fund the imminent war against Napoleon. Meanwhile, modern IHT can be traced back to 1894 when chancellor William Harcourt introduced estate duty – a tax on the capital value of land.  

In its present form, IHT replaced Capital Transfer Tax in 1986, by which time it had already developed a philosophical basis: as protection for the poor by intentionally interrupting the cycle of inherited wealth and redistributing it instead. 


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The future of IHT has once again come under scrutiny. In January, the current chancellor, Philip Hammond, asked the Office for Tax Simplification (OTS) to review the tax, describing the current system as “particularly complex”. 

Writing to the OTS, he asked them: “I would be most interested to hear any proposals you may have for simplification, to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.” 

The primary focus of the OTS review involves technical and administrative issues, including the processes for submitting IHT returns and paying any tax due, routine estate planning and disclosure.

Further aspects, Mr Hammond suggested, should examine the rules on gifts and their potential distorting effect on decisions about transfers and investments. Gifts are an obvious target: the annual IHT exemption for marriage gifts and small gifts has been £3,000 for over three decades. 

Paul Morton, tax director of the OTS, said: “We understand that many people are worried about IHT and might even take steps to plan for it when, in reality, their estate would not be liable for tax. We would certainly like to explore ways in which the position can be made clearer to put people’s mind at rest where that is appropriate.” 

IHT has been subject to much tinkering. In July 2015, the then chancellor George Osborne announced changes to IHT: those owning a property worth up to £1m would be able to leave it to their children or grandchildren completely free of IHT by 2020-21. Confirmed in the March 2016 Budget, the residence nil rate band allowance (RNRB) raises the IHT threshold (introduced in stages from April 2017 onwards) for those who satisfy the stipulated, and fairly complex, criteria.  

The RNRB provides an additional IHT allowance of £125,000 in the current tax year, which then increases by £25,000 in the next two tax years so that by 2020-21, the RNRB will stand at £175,000.

For those who qualify, IHT allowances will total £500,000, a figure that is doubled for married couples, resulting in £1m of combined allowances. From 2021-22 onwards, the RNRB will increase in line with the consumer price index (CPI).

Key points

In the UK inheritance tax goes back to 1694

Over the years the tax has been subject to much tinkering

Chancellor Philip Hammond has asked for a review of IHT by the Office of Tax Simplification

Unless the RNRB criteria are satisfied, everyone else in the 2018-19 tax year has a tax-free IHT allowance which is still £325,000 – a level that has remained unaltered for eight years with no current plans for it to rise in the near future. The standard IHT rate is also static – 40 per cent for anything above the £325,000 threshold (although this, in itself is adjusted to 36 per cent when 10 per cent or more of an estate passes to charity – another illustration of the complexity of IHT). Some tax experts have asked the government to reconsider the family home allowance as part of its simplification strategy.