On 8th March, the Chancellor Philip Hammond delivered on what had been promised to be a ‘boring budget’. Despite supposed breaches of the Tories’ manifesto commitment with a proposed increase to the rate of National Insurance for the self-employed (on which the Government has since performed a u-turn), there really wasn’t much in his hour-long speech that hadn’t been pre-announced.
Hammond’s decision to scrap the Autumn Statement and Spring Budget in favour of just one fiscal event a year—an Autumn Budget—has been described as a welcome shift away from ‘government by headline’. But amidst an attack from the opposition that Hammond should spend “less time writing stale jokes…and the Prime Minister less time guffawing like a feeding seal”, there’s something you may have missed: reform of inheritance tax legislation.
What are the proposed changes to Inheritance Tax?
Duties on inheritance have long been a delicate topic, made more confusing by the historical changes to its name. What was once legacy duty became succession duty, followed by estate duty, death duty and capital transfer tax. Regardless of name, the now-called Inheritance Tax (IHT) last year came out as the most detested of taxes, according to a poll conducted by left-wing thinktank the Fabian Society.
New details for changes to IHT were outlined in the 2017 Spring Budget regarding tax legislation and rates, first introduced by then-Chancellor George Osborne in 2015. From April 2017, the plan to cut inheritance tax will see the threshold value on which each individual will be required to pay increase by £175,000.
By 2020, this means a couple in a £1 million home will avoid paying any death duties at all, while the biggest beneficiaries could see a £140,000 reduction in their inheritance tax bill.
What does this mean for inheritors?
The Conservatives’ overhaul of inheritance tax has long been criticised for failing to relieve distortions in net wealth distribution between those who work and those who inherit. Now, commentators are debating whether IHT will “worsen the north-south divide”.
People inheriting homes in constituencies in London and south-east England will disproportionately benefit from the tax cut, where 96 of the 100 constituencies with the highest number of property sales over £650,000 are located, according to research commissioned by Labour MP Rachel Reeves. It’s clear these reforms fail to achieve much in terms of rebalancing the distribution of wealth.
It’s no wonder that there have been repeated calls for reforms to the increasingly toxic and inadequate system of inheritance tax. Exemptions such as the seven-year rule mean that the tax now yields a paltry £4.7bn, less than is raised by car tax.
But despite lowering the threshold, the Office of Budget Responsibility (OBR) now believes that inheritance tax will raise £1.8 billion more for the Treasury than was forecast last November. The calculations were buried in the Office’s biannual analysis of the economy, which was published alongside the Budget. Rising house prices and a boom in the stock market were named as the causes of the increased haul.
Could redistributive taxes from inheritance be realised in probate?
As we continue to hear calls for unearned, unmerited and largely untaxed wealth to be captured in some way or another, changes to probate are coming in that may do just that.
Probate is now being called the ‘new inheritance tax’ for large estates. Probate, otherwise referred to as a ‘grant of representation’, is a court order that gives a representative the legal authority to deal with a deceased person’s affairs. One purpose of probate valuations, prepared in accordance with HMRC guidelines, is to ascertain whether or not IHT will be payable on the estate and, if so, how much will be charged.
In tandem with reformed Inheritance Tax, new probate charges are set to come into effect this year. A government consultation has indicated that probate court fees, which are currently limited to a maximum of £215, are to be set on a new “sliding scale” which could see some people having to pay up to £20,000 on properties valued over £2 million.
No exact date has been given for the new structure to be in place, but the Ministry of Justice has confirmed that the Government will bring forward the plans in May 2017.
What does reform to Inheritance Tax mean with regards to Brexit?
One thing the new reforms fail to acknowledge are changes to home ownership structures in the wake of Brexit. KPMG recently reported that they would welcome a delay to the introduction of new rules, which now make IHT chargeable on all UK residential property for non-domiciled individuals, whether they are resident in this country or not.
In order for the UK to maintain its status as an attractive location for both British and overseas high net wealth individuals to invest, Greg Limb, head of KPMG UK’s private client team, says the government needs to focus on introducing changes that welcome non-domiciled investors. In the wake of Article 50 being triggered, it is more important than ever for the long term health of the property market to encourage property investors from abroad.
The Spring Budget’s blink-and-you’ll-miss-it proposal for Inheritance Tax reform, and the coming changes to probate, are tales of two halves. While neither makes considerable progress in the way of a significant redistribution of wealth, both have the potential to damage incentives for high net worth and non-domiciled investors to invest in property here in the UK.