Following the release of the parties’ manifestos for the upcoming general election, Devorah Ormonde examines reviews the potential for changes to inheritance tax being made by the new parliament.
The Office of Tax Simplification was instructed to undertake a review of inheritance tax in January 2018, culminating in two reports containing recommendations for modifications having been published in the last twelve months. Notwithstanding this, of the major political parties standing for election in England it is only the Green Party, the Brexit Party and UKIP that are proposing radical changes to the inheritance tax regime.
As the latest Survation poll published on 2 December 2019 projected these three parties to have a 7% share of the vote and only one parliamentary seat between them, it seems almost certain that none of these parties will be in a position to implement these proposals. It is therefore likely that inheritance tax will continue to be levied on estates throughout the next parliamentary term.
Whilst the Green Party favours consolidating inheritance tax and other taxes into a land wealth tax, the Brexit Party and UKIP have pledged to abolish inheritance tax altogether on the basis that it constitutes double taxation on assets accumulated over a lifetime. The Brexit Party notes that the tax has long been unpopular even amongst those whose estates are not large enough to have to pay it. They have also pointed out that it represents less than 1% of revenue raised from all taxes.
Although this may be correct, the revenue raised from inheritance tax is still projected to total £5.3 billion for the current tax year. This is hardly insignificant, particularly at a time when the Conservatives, Labour and Liberal Democrats are all proposing higher levels of public spending. It may be for this reason that neither the Liberal Democrats nor the Conservative Party have indicated an intention to make any changes to the inheritance tax regime.
In contrast, the Labour Party has stated that it would reverse the inheritance tax cut brought in by George Osborne in 2015, quoting analysis from the Treasury that this relief was most likely to benefit high income and wealthier households and that abolishing it would potentially raise an additional £725 million a year by 2021/2022.
The inheritance tax cut to which they are referring is the introduction of the residence nil rate band. With the main inheritance tax allowance of £325,000 having been frozen since April 2009, the aim of the residence nil rate band was to make it easier to pass on a family home to children or grandchildren.
The residence nil rate band is being phased in over a three year period, starting at £100,000 in April 2017 and rising by £25,000 each tax year until April 2020 when it is due to increase to £175,000. This can be added to the main inheritance tax allowance and transferred between spouses so that by April 2020, a married couple would be able to leave assets totalling £1 million to their children without incurring inheritance tax. This measure has already succeeded in removing thousands of estates from the scope of inheritance tax.
However, unlike the main inheritance tax allowance, the residence nil rate band is only available where the following conditions are met:
• The deceased owned and resided in the property.
• The property is left to direct descendants (including stepchildren and foster children but not nieces and nephews) immediately upon the death.
• The value of the estate does not exceed £2 million (above this figure tapering applies).
Even though it has resulted in many estates now being exempt from inheritance tax, the conditional nature of the residence nil rate band has caused some controversy. In addition, to avoid discouraging people to sell their homes to downsize or move into residential care, an further layer of complexity was introduced to prevent the right to the residence nil rate band being lost in such circumstances.
It is therefore not surprising that the Office of Tax Simplification has suggested that the government considers alternative options, including the abolition of the residence nil rate band, when conducting any review of its effectiveness. Perhaps the new government will revisit these inheritance tax proposals once more pressing issues have been addressed.
Please contact Devorah Ormonde or call 020 7467 5757 for more information about Inheritance Tax.