Get radical, Chancellor... kill off the death tax

IKNOW I am stating the bloomin’ obvious – and I know I’ve said it before – but with a Budget fast approaching I can’t help saying it one more time. So here goes. Some of the taxes we currently pay and a number of the tax breaks we are given to encourage us to save for old age are either too onerous or far too complicated.

Yes, it is time for a radical overhaul and Chancellor Sajid Javid has the perfect opportunity to be radical when he presents this Government’s first Budget on March 11.

For Javid, there are none of the tricky parliamentary obstacles to navigate that faced his predecessor Philip Hammond, hamstrung as part of a minority government.

With at least five years of Conservative government ahead of him and Labour in disarray – ridiculously waiting until April 4 before unveiling its successor to the politically bankrupt Jeremy Corbyn – there can be no better time for Javid to show his mettle as a transformative Chancellor. A Minister who is even prepared to unravel some of the complicated tax changes that his Tory predecessors (namely George Osborne) introduced.

Inheritance tax and tax relief on pension contributions are both ripe for a good dose of radicalism from the Chancellor.

Dealing with inheritance tax often resembles a minefield for those appointed to sort out the estates of loved ones. This is primarily – but not exclusively – a result of Osborne’s decision in 2015 to make the tax even more difficult to understand with the phased introduction from April 2017 of the ‘residence nil rate band’. This is a £150,000 top-up to the existing nil-rate threshold of £325,000, meaning that

£475,000 of an estate can now escape 40 per cent inheritance tax – provided the family home is passed on to a child, grandchild, great-grandchild or stepchild. It jumps to £800,000 if the deceased had previously absorbed their partner’s £325,000 nil-rate band.

As my colleague Marc Shoffman reports overleaf, Revenue & Customs has failed to adapt its various inheritance tax forms to accommodate this new residence nil-rate band. It means thousands of executors are unnecessarily filling in complicated forms they should be nowhere near. The Office of Tax Simplification, set up nearly ten years ago to advise the Treasury on how the system could be made less perplexing, has already called for inheritance tax to be simplified. But its recommendations have concentrated on overhauling the various gifts that can be made in someone’s lifetime to mitigate the tax.

Javid may well just act on these OTS proposals, but he could be bolder – by either scrapping inheritance tax altogether (tres radical) or doing away with the residence nil-rate band in favour of a bumped up nil-rate band (radical and sensible).

Inheritance tax is a form of double taxation. Corbyn would have expanded its net because he despises inherited wealth. Even more reason for Javid to be a radical.

On pensions, the rules governing tax relief on contributions are screaming out for reform. None more so than the rule, introduced by Osborne, that restricts the tax relief available to high earners – those earning more than £110,000 a year.

THIS is done through something called the tapered annual allowance that means the amount high earners can put into their pension – while benefiting from tax relief – drops in stages from £40,000 down to £10,000 a year (these sums include any employer contributions). The more you earn over £110,000, the smaller the annual allowance becomes.

While Corbynites may rejoice at this measure, it has resulted in many high earners – doctors foremost among them – receiving unexpected (and big) tax bills for unintentionally exceeding their reduced annual pension allowance.

It appears the Government is keen to address this issue by pushing up the threshold at which the tapered annual allowance kicks in – from £110,000 to £150,000. Fine, but Javid should be more radical. The allowance should be scrapped altogether as part of a radical overhaul of the pension system that currently disincentivises, rather than encourages, long term saving.