The cruellest tax of all could get even WORSE

INHERITANCE tax is despised by many and understood by few because of its bewildering rules and myriad exemptions. But the current regime will seem like nirvana compared to what Labour has up its sleeve.

Jeremy Corbyn and his shadow chancellor John McDonnell despise inherited wealth because they believe it perpetuates social inequality. As a result, they argue it should be taxed until the proverbial pips squeak. So it is inevitable the inheritance tax regime will be more punitive if they seize power – through the removal of exemptions and higher tax rates.

It is also likely Labour will spread the tax’s tentacles – resulting in more estates being caught by it. Latest statistics indicate only five per cent of deaths result in an estate being left liable.

With inheritance tax receipts accounting for less than one per cent of the total tax raised by Government, Corbyn will be minded to act quickly to increase the tax’s take.

In recent years – and in direct opposition to Corbyn – Conservative governments have tried to help families shield more assets from the tax with new allowances, although the current administration has courted widespread criticism with the decisi on to i ncrease t he charges bereaved families must pay (probate fees) for managing a deceased loved one’s financial affairs.

But t he c hanges have a l s o increased inheritance tax’s compl e xi t y. This poi nt has been accepted by Chancellor of the Exchequer Philip Hammond who just over a year ago asked officials at the independent Office of Tax Simplification to see whether the tax could be made fairer and easier to understand.

Although the office has yet to publish its final report – it is imminent – it has already acknowledged the tax is unpopular ( the most unfair of all major taxes) and administratively perplexing for those caught up in it. Currently, if someone dies, the first £325,000 of their estate – property, shares and cash minus debts – is exempt from inheritance tax. This is commonly referred to as the nil-rate band. Any sum above this is normally taxed at 40 per cent.

For married couples and civil partners, the rules also provide a spouse or civil partner exemption. This means that if one partner dies, the survivor can claim any of their unused nil-rate band, in effect providing them with a doubled- up allowance of up to £650,000. Finally, a new allowance, called the residence nil-rate band, is now available for individuals who pass on a home to a child or grandchild – including stepchildren, adopted children and foster children.

It acts as an add-on to the existing £325,000 nil-rate band and stands at £150,000 – rising to £175,000 next April. It means married couples and civil partners could potentially leave £1 million to their children with no inheritance tax to pay.

According to Laura Suter, personal finance analyst at AJ Bell, it is ‘likely’ this newish residence nilrate band could be among one of the first inheritance tax allowances to be axed by Corbyn.

Currently, various gifts – usually money or personal possessions – can be made by parents and grandparents to reduce their future inheritance bills.

Quentin Holland, a partner at financial planner The Private Office, says these should be utilised to protect family wealth. He adds: ‘Lifetime tax planning such as gifts to children and grandchildren is more pertinent than ever given the whiff of Corbyn is in the air.’ So there is an annual gift allowance of £3,000 that can be shared around as many people as you want – for example children, godchildren, nieces and nephews. If you failed to use last tax year’s allowance – the year ended yesterday – it can still be utilised this year, in effect doubling this year’s allowance to £6,000.

Gifts can also be made to children, grandchildren or friends who get married – a maximum of £5,000, £2,500 and £1,000 respectively. Additionally, there is scope to make ‘small gifts’ of up to £250 this tax year to as many people as you want. The only proviso is that such a gift cannot be made to someone who has already received a gift from you under a different exemption (the annual allowance for example).

On top, regular gifts can be made out of income provided they do not impact adversely on your standard of living. Finally, gifts called ‘potentially exempt transfers’ can also be made, but to be free of inheritance tax you must survive for at least seven years.

Although it will now be more tempting than ever to maximise these allowances given they may not be around for much longer, people should ensure they do not end up compromising their own standard of living.