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Phil Wickenden: Doing the maths on the future of IHT

Phil WickendenThe Chancellor has indicated that IHT needs simplifying but what would this mean for tax planning?

There are plenty of things in this world that people don’t understand because, hey, the world is a confusing place. But we can always take solace in the fact that there are some really simple concepts and ideas out there that we can all understand. However, as is often the way with the ol’ life, when you start to look closely at some of those concepts, you realise that you’ve opened a giant can of worms.

The equation 1+1=2 is probably the very first bit of maths most of us learned. If you have one Pokémon, and somebody gives you another, you have two Pokémon. Which is why it’s stunning that the proof for 1+1=2 is well over 300 pages long and it wasn’t conclusively proven until the 20th century!

IHT and estate planning is a touch more complex than 1+1 (though not as confusing as Pokémon). In January, having collected his 39th Pokemon, a request was made by the Chancellor of The Exchequer to simplify the tax. Inheritances for 2015/16 equated to £127bn but the effective rate of IHT on that was just 4 per cent, so it is unsurprising that interest has been piqued.

Phil Wickenden: Complex IHT regime offers opportunity

At the more radical end of the spectrum, some think-tanks have called for a donee-based tax and the removal/reduction of many exemptions as part of the solution to what is seen as unjustifiable disparity in wealth driven by relatively undiminished wealth transfer down the generations … money goes to money.

The fear from some planning and specialist provider enclaves is that moving to (as mooted by some) a lifetime receipt-based system could signal the end to both the seven-year cumulative gifting rule and the normal expenditure out of income exemption, thus removing many of the tax planning opportunities currently available.

Old Mutual Wealth calls for IHT nil-rate band rethink in Treasury open letter

Of particular concern are the potential changes that could come around for business relief (formerly BPR). Reliefs currently cost the Treasury £1.22bn and the Resolution Foundation wants to see if the current rules create any distortions that redirect tax payers’ investments and transactions. There is seeming interest to remove any predominantly tax-driven motivation for owning the assets.

To this end there are suggestions – and they are just that at this stage – to:

1) cap the relief,

2) increase the minimum ownership period and

3) limit the relief to “real” farmers and business owners

It may be that only some or even none of these recommendations are taken up. Let’s not forget that the appetite, and resource, for major reform is low while the uncertainties surrounding Brexit loom large.

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Phil Wickenden is managing director at Cicero Research

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