We all want a tax system which is fair, but we’d also like it to be simple – which is rarely the case. Take for example the new inheritance tax rules. You’ll recall the government announced that individuals will be able to leave property of up to a certain value (initially £100,000 rising to £175,000) to family members without a tax charge. You may agree or disagree with the policy, but at least it seems straightforward. But then the complications set in.
For example, is it fair that somebody who downsizes before their death should lose out? What about somebody who sells their home to move into sheltered accommodation - should they forfeit the relief? The government has recognised these concerns, and so the straightforward concept of a tax-free property allowance is modified to take account of these, and other, situations where it seems fair to depart from the basic principle. I think most would approve of this.
But these policy extensions have to be written into law, and this is when the complexities start. How do you define downsizing? How long before death do you have to downsize? Can you downsize more than once? Before you know it, you end with a highly complex set of rules. The legislation putting this into effect hasn’t yet been published, but we do have an HMRC discussion document setting out some of the areas needing to be addressed.
I’ve read some of the examples several times and still can’t get my head around all the nuances of what’s being proposed, and I mention this to illustrate how difficult building fairness into the system actually is, and I fear the final legislation will provoke a lot of head scratching…
The government could have gone the other way – an increase in the nil rate band for everybody so the limit for a couple was £1m regardless of whether their estates included a private residence. That’d be simple to understand and only involve a small amendment to the legislation. But would it be fair? It would have given an IHT boost indiscriminately to the wealthiest individuals in society regardless of what property they owned.
There’s no right answer here – it’s a matter of judgement and ultimately political decisions. But it illustrates the problem. In the tax world 'simple' and 'fair' don’t go together like a horse and carriage – they are more like chalk and cheese.