As I had a conversation with a client today, I came to realise just how complex some areas of legislation have become in recent years.
It seems that there is a trend for adding new elements to existing legislation or ‘retro-fitting’ old rules to fit current circumstances.
The problem with both approaches, is that it leads to rules that are confusing and complex and which are often not really fit for purpose.
A great example is Inheritance Tax. Where as before, we had the ‘usual’ £325,000 nil rate band which I think many people had become reasonably comfortable with, we now have the new ‘Residential Nil Rate Band’ which is a great example of things being bolted onto existing legislation.
This new allowance looks innocent enough on the surface – a further £175,000 of IHT exempt assets sounds good to most people – however when you start to dig a bit deeper, things are not quite what they seem.
For a start, the new allowance only applies to a select number of people, namely those who own a home worth more than £350,000 (as a couple, £175,000 for a single person) and whom have children. This alone rules out a reasonably large portion of the population. Add in the fact that the allowance starts to taper down on a 2:1 basis when your estate exceeds £2m and many types of trusts commonly in wills are also excluded from claiming this allowance, and we end up in a situation where it is thought only around 5% of the population will be eligible to claim. There are many other nuances which are beyond the scope of this article, but which muddy the water even further.
Now on the one hand, you could argue that this is a political masterstroke – the government achieved the headlines of a £1 million IHT allowance and the media seemed happy. On the other hand however, it has introduced a huge amount of additional complexity into what was already a far from simple area of financial planning.
Perhaps one day policy makers will realise that sometimes it really is better to rip up the existing rule book and start again – then again they may not!
Until then, we will do our very best to cut through the complexity on behalf of our clients’ and to present solutions which are as clear and easy to understand as possible.