Why ‘unfair’ death duties need a radical overhaul

As a major review of inheritance tax is launched, calls grow to ditch the new ‘family home’ rule. Sam Brodbeck reports

Scrapping the new “family home allowance” is the answer to reforming Britain’s complex and discriminatory inheritance tax system, according to senior tax experts. Policymakers are being urged to use a review of death duties to rewrite rules that are leaving grieving families dumbfounded by their complexity – and discriminate against those without children.

The Government’s income from inheritance tax has increased year-on-year since 2009, hitting £4.8bn in 2016-17, the last tax year for which figures are available.

Despite the introduction of a new allowance last year, booming stock markets and high house prices are on course to push inheritance tax receipts to £5.3bn this year. Each person can pass on £325,000 tax-free while an additional £100,000 is available in respect of property under particular circumstances. Above these allowances, tax is due at 40pc.

At the start of the year, Chancellor Philip Hammond commissioned the Office of Tax Simplification (OTS), an independent Treasury department, to come up with improvements to the system.

Last month, the OTS confirmed the scope of its investigation and today Telegraph Money sets out why and how the inheritance tax regime should be reformed. Ahead of the 2015 election, the Tories pledged to let families pass on £1m taxfree by 2020. But instead of simply raising the existing nil-rate band, former prime minister David Cameron unveiled plans for an entirely new allowance. Technically called the “residence nil-rate band” – but better known as the family home allowance – this has given individuals an extra £100,000 where a home is being passed on.

Introduced in April 2017, the allowance is to increase each tax year until reaching £175,000 in April 2020. As married couples and civil partners can inherit each other’s allowances, that means a couple could pass on a £1m property tax-free. However, the practical application of the rules is far more complex.

Firstly, the allowance only applies where a main residence (not a second home) is passed to direct descendants. The Government defines descendants as children and grandchildren, as well as step, adopted or fostered children or grandchildren. Nephews, nieces, siblings and other relatives are excluded. Any properties held in trust also do not benefit.

As Telegraph Money has highlighted before, hundreds of thousands of wills must now be urgently rewritten to remove terms that place property into trust on death, a commonly used method of shielding assets from the taxman in the past.

Fearful that the rules would stop people downsizing, the Government also said the allowance could still be claimed for any properties sold after July 2015, when the policy was first announced. Those who have moved to a lower-value property or own no property at all will still get the full allowance.

The final complication is the tapering of the family home allowance on estates worth £2m or more. Over this threshold, the allowance is withdrawn at a rate of £1 for every £2. In this tax year that means estates of £2.2m or more do not benefit from the allowance at all.

Scrapping the home allowance entirely and increasing the existing £325,000 allowance by the same amount would strip out much of this complexity – and make the system fairer. Under current rules, couples without children will miss out on £350,000 of the allowance. Likewise,