A good example of the need for simpler processes is the main residence nil rate band (RNRB). This is being phased in from April 2017, and the ability to claim this additional allowance should not be assumed. There are complex rules to consider, including conditions regarding who inherits the property and downsizing, as well as a tapering of the allowance for those with estates worth in excess of £2m. By any standards, RNRB is a fine example of a simple piece of political willpower getting bogged down in administrative practicalities.
The chancellor is also keen for the OTS to look at "whether the current framework causes any distortions to taxpayers’ decisions surrounding transfers, investments and other relevant transactions". Undoubtedly it does.
As IHT law currently stands, individuals who are retired with wealth in excess of the nil rate band (or double the nil rate band for couples) should consider putting a plan in place to deal with IHT. Often, children with parents in that position can formulate an IHT plan together with them so that, with straightforward actions, tax planning can be mitigated.
Pension planning
Nevertheless, the desire of many parents to help their children onto the housing ladder now means they face a conundrum. While they would like to do more to help their children by providing money towards the mortgage deposit, their assets are illiquid. At first sight, this is where the pensions freedoms might have come into play. Undoubtedly, more people are drawing money out of their pension plans for diverse purposes, including inter-generational wealth planning.
However, many people are realising that individuals who die before the age of 75 can pass on the pension fund tax-free, without any restrictions. When someone dies over the age of 75, the fund can be withdrawn in stages and taxed at the beneficiaries’ marginal income tax rates, rather than being subject to an immediate 55 per cent tax charge. Suddenly, the undrawn value of a pension plan becomes an attractive asset for those worried about inheritance tax.
Those familiar with inheritance tax will know that none of these criticisms are new. So why should the chancellor invite the OTS to review IHT now, especially when Brexit leaves parliament with so little time to debate any significant tax proposals?
The clue is to be found in these words in the chancellor's letter to the OTS: "Also look at how current gift rules interact with the wider IHT system".
If calls for reforming IHT have for years been piling up like straws on the back of the proverbial camel, then HMRC's recent letters to major donors to the Brexit campaign represent the straw which broke the camel’s back.
