Inheritance tax (IHT) wasn't mentioned much in the Budget.
The Budget policy paper from HM Revenue & Customs merely confirmed that IHT nil-rate bands will remain at existing levels until April 2026.
So the nil-rate band will continue at £325,000, the residence nil-rate band will continue at £175,000, and the residence nil-rate band taper will continue to start at £2m.
The Office of Tax Simplification (OTS) had made a series of recommendations across two reports as part of its IHT review.
Its first report in 2018 concentrated on the administration of IHT.
Recommendations included making the process more digital, improving processes for lifetime and trust charges and updating and clarifying forms and guidance.
The government has confirmed that work on these will continue.
A second report from the OTS followed in 2019, considering the design of IHT.
This time proposals were focused around issues such as the taxation of lifetime gifts and a review of business exemptions.
The government has said it will respond to these recommendations in due course.
So while the nettle has failed to be grasped so far, there continue to be many issues surrounding the design of IHT.
Here, we'll look at three of them.
Business property relief and agricultural property relief
As the OTS pointed out, the main policy rationale for BPR and APR is generally understood.
This to to remove the need for the sale or break-up of businesses or farms to finance IHT payments following the death of the owner.
But that is arguably only valid where the business ceases on the death of the owner.
Where the business continues under new ownership, there is no loss of employment and no disadvantage to customers.
In these situations, is it right that the owner gets 100 per cent relief in respect of the value of his or her ‘ownership’ shares, or other interest in the business?
A basic principle of both BPR and APR is that relief shouldn't be available in respect of investment activities, as opposed to trading activities.
This has led to a number of disputes before the Tax Tribunal, the most recent cases concerning the availability of relief to those who own holiday letting businesses.
The boundary between trading activity which qualifies for relief, and investment activity for which no relief is available, is often difficult to establish.
The OTS has gone a step further, saying;
“In relation to third party investors in AIM-traded shares, BPR is not necessary to prevent the business from being broken up or sold in order to fund the payment of IHT.
“This raises a question about whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.”
Residence or domicile?
IHT is charged on estates of individuals domiciled in the UK, and in respect of UK assets owned by those domiciled elsewhere.
Domicile can be difficult to determine; residence, on the other hand, can be relatively easily established using a set of rules formalised in the Finance Act 2013.
It has long been government policy that ‘non-doms’ who are long-term UK residents should be taxed on the same basis as UK domiciled individuals.
This has been largely achieved when it comes to income tax and capital gains tax.
So, in an attempt to apply this principle to IHT, the concept of 'deemed domicile' was developed.
Individuals who are UK resident in 15 of the 20 years before a chargeable transfer occurs will be treated as UK domiciled. Additional rules apply where domiciled individuals leave the UK.
Unfortunately, the impact of these provisions can be easily avoided.
Replacing domicile with residence as what determines IHT liability would offer a more logical approach to taxing those who are 'internationally mobile'.
Most, but not all, pension arrangements fall outside the scope of IHT.
This is because the pension scheme member can't control the destination of death benefits and, as a consequence, those benefits aren’t treated as an asset. Death benefits are paid at the discretion of scheme administrators.
Some old arrangements such as retirement annuities aren't structured with a discretionary disposal, and some occupational schemes like the NHS suffer a similar disadvantage.
As a matter of policy, regardless of which party is in government, pensions have always enjoyed favourable tax treatment.
The situations in which an IHT charge arises relating to membership of a pension scheme are very rare.
But for those families impacted, the liability can be a significant burden. It would be a simple matter to exempt all pension death benefits from IHT.
There are many other aspects of the current IHT code which could be improved. But tackling these areas would be a good start.