Inheritance tax (IHT) and other taxes were targeted by Rishi Sunak and the wider Government on March 23, as “tax day” plans were released. For IHT, the changes mainly concerned administrative procedures.
The Government confirmed: “Today’s update will also cut inheritance tax red tape for more than 200,000 estates every year, dramatically reducing the amount of paperwork many families fill out.
“Over 90 percent of non-tax paying states each year will no longer have to complete inheritance tax forms when probate or confirmation is required from January 1 2022.
“None of today’s announcements will have any impact on the government’s finances or require legislation in the current Finance Bill.”
While the changes announced were broadly welcomed, many dubbed the plans to be a “damp squib”, especially considering that the Office of Tax Simplification (OTS) recently made a number of suggestions and proposals for the Government which haven’t been acted upon.
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Anna Murdock, the Head of Wealth Planning at JM Finn, expanded on this: “The ‘Tax Day’ announcement by the Treasury which removes the administrative burden for so many who would otherwise be required to complete IHT paperwork is very welcome news.
“It was confirmed that over 90 percent of non-IHT paying estates would no longer be required to file IHT forms and where forms were required, physical signatures should not be required from all parties involved.
“The current administrative system is not as efficient as it could be, and has long needed an overhaul.
“We were hoping to also see the Government’s response to the OTS reports on potential changes to Inheritance Tax and Capital Gains Tax, however disappointingly the only response received in this area was in relation to changes to the administration of Inheritance Tax (IHT).”
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Similar sentiment was shared by Eddie Grant, a Director and tax specialist at St James’s Place, who reflected on what tax changes may be on the horizon in the Autumn Budget: “The Chancellor told us on Budget Day how big the national debt is, but as yet has only tentatively begun explaining how the debt will be reduced. Freezing of the allowances is an effective start but not enough.
“There was great speculation about Tax Day but once again the announcements were limited and left us wondering. The government has over the year commissioned a series of consultations so there was an expectation they would be the focus of the Tax Day announcements in particular Inheritance Tax and Capital Gains Tax but there was only minor changes.
“The Office of Tax Simplification in its 2019 consultation highlighted that Inheritance Tax was outdated with 275,000 tax forms resulting in 24,500 estates paying IHT.
“Amongst the Tax Day documents the Chancellor has announced that 90 percent of non-taxpaying estates will no longer need to complete IHT forms from 01/01/2022, although no changes to the gifting allowances frozen since the 1980’s.
“There were no announcements about pension tax relief despite it being widely speculated and no changes to Capital Gains Tax, could these be planned for the Autumn Budget when we get the detail?”
As it stands, IHT is levied on the estate of someone who has died and is passing on their assets, so long as the total value of their estate is higher than £325,000.
The standard IHT rate is 40 percent but this is only charged on the part of the estate that is above the £325,000 threshold.
So, for example, if an estate is worth £500,000, IHT would only be charged on £175,000.
Where IHT is due, it must be paid by the end of the sixth month after the person’s death.
If the tax is not paid within this timeframe, HMRC will start adding interest to the debt.
It is possible to reduce how much IHT is due on estate and while this is a complicated area, the Money Advice Service highlight that the following actions could lower tax costs:
- Leaving a legacy to charity
- Putting assets into a trust for your heirs
- Leaving an estate to your spouse or civil partner
- Paying into a pension instead of a savings account
- Regularly giving away up to £3,000 a year in gifts
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