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A Short History of Inheritance Tax

Some people still sometimes refer to Inheritance Tax (IHT) as Death Duty. The tax has gone by a number of names over the years (not all of them complimentary…) and was, perhaps, most memorably characterised by Labour Chancellor Roy Jenkins as “…a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”

Indeed, Estate Duty, one of IHT’s predecessors, became known as a largely voluntary tax as it was possible to take steps to substantially reduce the tax charge on death by gifting property. There was no tax on such gifts if they were made more than seven years before death.

Harold Wilson’s government introduced Capital Transfer Tax (CTT) in 1975 to replace Estate Duty. CTT was intended to be more difficult to avoid and introduced a lifetime charge to tax on gifts whenever they were made. There were certain exemptions and reliefs as well as a set of complicated rules for taxing property settled on trusts.

During the mid-1970s, the tax avoidance industry was busy creating CTT avoidance schemes but these they were largely defeated by the Inland Revenue (as it then was). A number of insurance-based mitigation packages were launched in the early 1980s and were particularly popular – perhaps more with the Taxpayer than the Revenue - because they exploited the facility under the Capital Taxes Rules of giving an asset away and keeping control, and retaining an annual benefit from the gifted property while at the same time removing it from the estate for CTT purposes.

Such creativity on the part of the avoidance industry was, in part, the reason that CTT was tweaked and, some say, rebranded, as Inheritance Tax in 1986. Although similar in many respects to CTT, IHT also looked over its shoulder and borrowed a number of features from its grandparent, Estate Duty. IHT legislation remains relatively poorly drafted, with imprecise language and a number of grey areas as yet unenlightened by judicial comment. An example is the Gift with Reservation of Benefit provisions.

Policy statements by Tony Blair’s government were intended to close IHT loopholes and increase the take accordingly. Some commentators have suggested that a number of Gordon Brown’s Finance Acts were dominated by hastily enacted anti-avoidance provisions. That said, Labour introduced the transferable nil-rate band (albeit in order to spike the Tories proposal to raise the NRB to £1,000,000, if elected) and the coalition has said it will maintain the NRB at pre-election levels.

IHT is an expensive tax to collect and, with an annual take of only £2.4bn, raises a tiny proportion of the total UK take of £408bn. However, the prospects for simplification of a part of the IHT regime are starting to look rosy: HMRC have proposed that they extend the S.256 IHTA exemption to some estates where the first spouse of a couple uses none of their available NRB and transfers it all to the survivor. HMRC estimates that this might apply in about three quarters of estates where the TNRB is invoked. To that extent, PRs' lives might soon be made easier.