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WAY suggests way to simplify IHT

Simplification of the rules around inheritance tax (IHT) could contribute significantly to funding care in old age, according to WAY Investment Services.

The tax specialist advocates removal of the Residence Nil Rate Band (RNRB – available when residential property is left to direct descendants) which are complex and unfair. And it recommends aligning the AIM (the London Stock Exchange’s international market for smaller growing companies) investment rules with the gifting rules for inheritance tax, ie that the person leaving the gift must survive for seven years for the gift to qualify for tax exemption.

Currently, certain AIM investments qualify for potential IHT exemption after two years, which may, WAY argues, seem to offer an opportunity to mitigate IHT in the same way as making a gift. But the rules can easily be misunderstood; only certain AIM companies benefit from Business Property Relief (BPF) which makes the shares exempt from IHT but only if invested for two years and held on death.

Way says if the BPR rules were returned to the original Finance Act 1976 definition (whereby families could pass down businesses without incurring an IHT charge that would require the businesses to be broken up) and AIM share investment were no longer IHT exempt after two years, then additional IHT up to £14.4bn could be raised by the Treasury and used to fund care costs.

John Humphreys, Inheritance Tax Specialist at WAY Investment Services said: “It is clear that the rules have, over time, become far too complicated. The complexity of the rules also means they are open to mis-interpretation. 

“Scrapping the RNRB and adding the same incremental increases to the main nil rate band would instantly sweep away a whole layer of complexity and unfairness.

“The current rules for AIM investments encourage behaviour which may not in in clients’ best interests. The intention of the original Finance Act 1976 was for families to be able to pass down businesses without incurring an IHT charge that would require the businesses to be broken up.”

Over time that intention has been lost he says and the rules are driving people to invest in AIM to avoid IHT. He says that whilst such investments are right for some they are not for all especially older clients with reduced life expectancy.

Humphreys adds: “The issues of the NHS and social care funding for the elderly and IHT are inextricably linked so we have to consider them together in order to find solutions. Any changes need to focus on simplification which means aligning rules and removing unnecessary rules, with AIM and the RNRB key targets.”

The Office for Tax Simplification (OTS) consultation on inheritance tax, put into place after the Chancellor of the Exchequer and the Financial Secretary to the Treasury requested that it carry out a review of a range of aspects of Inheritance Tax and how it functions today to identify simplification opportunities, ended in June of this year and the OTS says it hopes to report back this Autumn.

 

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