Pensions - Articles - Number ten change gives chance to overhaul IHT rules


As the race to become the next Conservative Party leader and Prime Minister intensifies, financial advice firm, NFU Mutual is calling on the various leadership hopefuls to boldly champion much-needed change to Britain’s Inheritance Tax (IHT) regime.

 As the race to become the next Conservative Party leader and Prime Minister intensifies, financial advice firm, NFU Mutual is calling on the various leadership hopefuls to boldly champion much-needed change to Britain’s Inheritance Tax (IHT) regime.
  
 Outlining a four-point plan to overhaul the current system, Sean McCann, chartered financial planner at NFU Mutual, says: “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.”
  
 As consumers and regulators alike await clarity on the identity of the new PM, as well as the imminent publication of the Office of Tax Simplification’s review on the subject, NFU Mutual recommends:
  
 Replacing the current system, where IHT is levied on what individuals leave behind, with a tax on the recipient
 - This would mean each recipient would have a tax-free allowance based on their relationship to the deceased, like the system for Capital Acquisition Tax in the Republic of Ireland.
 - 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.
 - For those without children, an arrangement like the ‘favourite niece or nephew relief’, which treats the recipient in the same way as a child of the deceased for tax purposes, could be considered.
 - This approach is designed to maximise the available pot to be shared, rather than the current system which effectively cuts it off at the source.
  
 Introducing a single, simple annual gifting allowance of £25,000
 - 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, gifts out of ‘normal expenditure’, gifts for the national benefit and even gifts to political parties
 - Many people simply aren’t aware of many of these exempt gifts
 - 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
 Consigning the fiendishly complex Residence nil rate band to history
 - This currently allows some or all of a home to be left free of IHT – currently £150,000 per person, due to rise to £175,000 next tax year
 - This extra tax break can only be secured if property is left to ‘direct descendants’, meaning those who don’t have children don’t get it
 - 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
  
 Removing the uncertainty around IHT treatment of pensions
 - In most circumstances, money left in pensions on death can be passed on free of IHT
 - If someone transfers their pension while in ill health and dies within two years however, this can lead to an unexpected tax bill for the family
 - In this instance, HMRC may take the view that a transfer has been made primarily to improve the death benefits for the family
 - People may want to transfer their pensions for a number of reasons – those in ill health face uncertainty as to whether this will leave a bill for the family
  
 Sean McCann concludes: “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.” 

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