The death of IHT as we know it?

Anyone who has wrestled with estate planning and Inheritance Tax (IHT) knows that it is a complicated area, so it is good to hear that the Chancellor also finds the system “complex” and wants it to be “simpler, fairer and better”.

Soaring IHT receipts are in part down to the unprecedented rise in house prices in the last 30 years; owners of relatively modest properties have begun to pay a tax once only paid by the wealthy.

In January, Philip Hammond wrote to the Office of Tax Simplification (OTS) asking for a review of the IHT regime, “to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.”

As you can see, he also highlighted the way current gift rules work with the wider IHT system, and wanted to know whether the current system causes “any distortions to taxpayers’ decisions surrounding transfers, investments and other relevant transactions”.

What can we expect from the review?

One thing we can’t expect is a major cut in IHT liability: in 2017 HMRC received £4.84 billion in IHT – double the amount in 2009. The Government will not want to kill the goose that lays the golden eggs. In fact, entirely the opposite, an increase in potential revenues is arguably the driver for the review. IHT is generally charged at 40% unless an exemption or relief is available. We believe it is those exemptions and reliefs that will be the subject of this review.

Nil rate bands

Every individual benefits from a nil rate band (NRB) set at £325,000 until 2020/21. Assets within this will be free of IHT. However, this rate has been frozen for many years and has not kept pace with inflation.

The Transferable Nil Rate Band (TNRB) allows any unused percentage of the standard NRB to be transferred from a deceased spouse or civil partner to the surviving spouse or civil partner.

Recent Conservative governments have shown sympathy for allowing people to hand on more of their wealth after death, particularly the family home. Philip Hammond introduced a Residence Nil Rate Band (RNRB) – with the headline-grabbing promise of allowing couples to pass on up to £1 million free of tax including the family home.

Unfortunately, he only succeeded in adding a further layer of complexity to the IHT regime.

Closer examination of the rules shows that the full £1 million is only available in certain circumstances.

It is for married couples, or those in a civil partnership, with children and relies on one partner dying and passing their entire IHT exemptions to the surviving partner.

The eventual beneficiaries must be direct descendants, so single people and childless couples do not qualify for the £1 million bonanza. The RNRB has been criticised for being unnecessarily complicated, so may be in the firing line.

Lifetime gifts

The annual tax-free gift allowance has remained at £3,000 since 1981 and its value has been considerably eroded.

Once again, burgeoning house prices come into play. Parents see their offspring struggling to get on the housing ladder and want to give financial help when it is needed, not when they die.

Although £3,000 would have been a reasonable deposit on a house in 1981, today the average firsttime buyer needs £20,000, and in Cambridge significantly more!

The small gift exemption of £250 per receipient and gifts on consideration of marriage have been eroded in the same way.

A special exemption applies to regular gifts made from excess income. These gifts are not made from capital and fall completely outside the IHT net.

The OTS could recommend increasing the annual gift exemptions, but equally it might suggest there should be no need for these exemptions at all, as it is possible to make any level of gift to an individual as a potentially exempt transfer (PET) on which no IHT will be due if the donor survives for seven years after making the gift.

Agriculture and business

The ability to pass on the family home intact has a very powerful appeal to the electorate, and the same applies to a family farm or business.

So both Agricultural Property Relief (APR) and Business Property Relief (BPR) will almost certainly come under scrutiny in the OTS review.

The intention of BPR was that family businesses did not have to end on death. Full relief from IHT is generally given where the business qualifies.

Agricultural Property Relief 

Currently, an individual who dies owning farmland and farm buildings can claim APR on the agricultural value of those assets even if they are not a farmer. For people undertaking a genuine farming business there is no need for APR as BPR would provide the same relief.

This does however place even more importance on ensuring that you are running a qualifying business. Farmers who have had to diversify and rent out much of their land or buildings could be particularly at risk in this respect.

Business Property Relief 

Could we see BPR being restricted to those who participate in the business rather than simply invest in it? This could signal an end to BPR on investments in, for example, AIM companies.

One other rumour surrounding BPR is that the rules could be amended so that the recipient of the asset(s) must retain them as business assets for a certain period in order for relief to be due. Currently there is no such requirement.


Trusts are often used very effectively for IHT planning. HMRC has already announced a separate review of the taxation of trusts in 2018, to make them “simpler, fairer and more transparent”. It is likely that the OTS review will incorporate this.

Deeds of Variation

Where planning has not been undertaken it is possible to change a person’s Will after their death, using a Deed of Variation. This has received high profile scrutiny in recent years and the OTS may once again consider whether this should be allowed to continue.


It is likely that the review will conclude that the current IHT regime is too generous otherwise there will be little movement in tax revenues. The result of the review may be announced in this year’s Budget in November. 

Anyone who could be impacted by a change should act now to protect reliefs while available. 


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