AAT: Inheritance Tax widely misunderstood and unnecessarily complicated

AAT has responded to the Office for Tax Simplification (OTS) inheritance tax (IHT) review,  stating the tax is widely misunderstood, unnecessarily complicated and that several exemptions should be scrapped. IHT receipts are rising rapidly, raising £5.3 billion over the past year to the end of February 2018, a record high. At the same time, only four per cent of estates pay IHT. AAT suggests that this fact needs to be more effectively communicated to the public, as many wrongly believe they will be affected.

Scrap exemptions

Certain exemptions (gifts on marriage, exemptions for gifts generally, gifts to political parties, the small gifts exemption etc.), are all reliefs that the public are largely unaware of, require a degree of planning and will usually only be taken advantage of if professional advice is given. They should therefore be scrapped. AAT recognises that some are likely to complain about the removal of these reliefs but says scrapping these exemptions would not cause considerable consumer detriment, would save the taxpayer money and would add to a simplified IHT landscape that can be more easily understood by all. AAT’s consultation response also recommends the removal of the charitable giving exemption introduced in 2012. Phil Hall, AAT Head of Public Affairs & Public Policy said;

The charitable exemption is a substantial additional cost to the taxpayer but probably doesn’t equate to any more charitable giving than would have been the case anyway. It simply means that some estates are gaining substantial tax savings. It should go.

Nil Rate Band should stay the same  

Numerous commentators have recommended that the £325,000 Nil Rate Band (NRB) be increased, simply because it has not increased, even in line with inflation, since 2009. In contrast, AAT’s consultation response states, “…there are no sound economic reasons to do so.” before going on to highlight that, “The average house price in January 2018 was £225,621 (based on the UK House Price Index), the average UK family - not individual - has a total of £3,134 in savings and investments, and 25% of the country has less than £100 in savings and investments, based on a 2017 report from Aviva.” Phil Hall added:

As well as the statistical data about house prices and savings, new provisions allowing individuals and married couples to pass on their main home with a smaller tax liability are far more than any inflationary linked increase would achieve. For the majority, the £325,000 threshold (£650,000 for a married couple) is more than sufficient, especially when property allowances are factored in. Unlike many commentators, AAT therefore recommends that the NRB be maintained rather than increased.

Other recommendations

AAT makes numerous other recommendations in its consultation response, including cutting the £1bn cost to the taxpayer of tax relief currently given through Business Property Relief (BPR) and Agricultural Property Relief (APR). AAT recommends this should be done by focusing the reliefs on businesses and farms instead of incentivising assets to be held primarily, and often purely, for tax reasons. Phil Hall concluded:

The simplest means of removing complexity around IHT would be to scrap it and rely solely on Capital Gains Tax (CGT) as they’ve done in Australia since the 1970s. This would be far simpler and some might argue, a more meritocratic approach to taxation. However, AAT accepts that the political appetite for such radical reform in the UK is unlikely to exist and instead suggests aligning definitions, scrapping exemptions and undertaking simple, sustained communications activity that helps to ensure the public knows most people are unlikely to be affected by this tax.