While gathering tax news from around Christmas, Anita Monteith came to the conclusion that issues of tax related to orphaned children, siblings and marriages is just not fair at all.

In early January I found myself gathering together tax news from the Christmas period. There always seem to be a few surprises during holiday periods and December 2019 was no different.

Orphaned children

A very long time ago, when I first started lecturing on tax, I was covering the basics of capital transfer tax (the predecessor of inheritance tax (IHT) for our younger readers). The usual “What if…” questions began as the students warmed up and someone asked what happened if both parents died in a car accident, leaving their young children orphaned? I remember thinking surely there had to be an exemption somewhere. Maybe it just wasn’t in the syllabus because it wouldn’t happen often so was considered unimportant for the exams?

Back then, I really did think that there had to be a core element of fairness in tax, and that it would not be charged in circumstances where to do so would force the sale of the family home. How very naive I was. Of course, the position was and still is that the value of the estates of the dead parents in excess of their nil rate bands would be chargeable at 40%. In crude terms this means the home would have to be sold for the tax to be paid, and the children would be taken in by relatives with their net inheritance tucked away for later.

Sibling harmony

In another scenario, it is not uncommon for unmarried siblings to continue living in their shared family home throughout their lives. Five years ago, one of my neighbours had been in this position and died, leaving her sister the family home together with an unfortunate IHT bill. The house had to be sold to pay the tax.

In my view both of these situations deserve sympathy and consideration if IHT, and tax more generally, is to be seen as fair. Sadly, it is unlikely that those facing these and similar situations will have either the necessary understanding of IHT or the lobbying power to achieve change that makes it fair.

Tying the knot

The Civil Partnerships, Marriages and Deaths (Registration etc.) Act 2019 came into force on 31 December 2019, giving heterosexual couples the right to choose to have a civil partnership instead of a marriage. For those interested in the background to the Act, this change is further to a Supreme Court judgement given on 27 June 2018 in the case of R (on the application of Steinfeld and Keidan) (Appellants) v Secretary of State for International Development (in substitution for the Home Secretary and the Education Secretary) (Respondent) [2018] UKSC 32 in which it was held that the Civil Partnership Act 2004 was incompatible with the European Convention on Human Rights because it only applied to same-sex couples.

There are lots of reasons why people marry but I suspect that, aside from love and commitment, tax and money are quite high on the list. In the space allowed here I am focusing on tax and in particular fairness and the spouse exemption from the charge to IHT. 

A legal commitment to another person, either through marriage or through civil partnership, ensures there will be no IHT to pay on the death of the first if they leave all their wealth to the surviving spouse or civil partner.

A big fuss was made in recent years because the value of the average home had increased to more than the nil rate band, so many more family homes were subject to IHT following the death of the surviving spouse. So first the nil rate band was effectively doubled for married couples and civil partnerships by introducing the transferable nil rate band. Second came the residence nil rate band (again transferable between spouses), along with that horrendously complicated downsizing relief.

Couples no longer have to buy into the idea of marriage to benefit from this and may now be able to benefit from relief by entering into a civil partnership instead. And it is a totally free choice for same-sex and opposite-sex couples to pick which ceremony they prefer.

A new tax relief?

The problem I have is that many who cohabit couldn’t have married or had a civil partnership, and family stability and its benefits for society extend to other relationships too. I am talking about siblings who have shared a home, sometimes for a lifetime, and to children who are left orphaned following the untimely death of their parents. “Ah yes but,” you may say, “surely these are a tiny minority. Why make a complex tax even worse by introducing yet another relief where the tax at stake would be tiny? Surely these are rare circumstances?”

In July 2019, the Office of Tax Simplification (OTS) published a second and final report following its Inheritance Tax Review: Call for Evidence published in April 2018. The first part of the review had focused on IHT forms, administration and guidance, on which it published its response in November 2018. The second part focused on specific areas of IHT and how they interact with one another. Although they made lots of sensible simplifying suggestions, the remit of the OTS does not include adding extra tax reliefs, even where the results might make things a bit fairer.

So how do we encourage governments to look at new ideas which would make life a little more equitable, when to do so would add to the list of reliefs which is already very long indeed?

As I pondered this, I began searching the internet for possible solutions and came across a House of Lords Private Members’ Bill. On 14 January 2020, Lord Lexden proposed an amendment to the Inheritance Tax Act 1984 which would make a transfer of property between siblings exempt from IHT provided the survivor had lived in the same property as the transfer or continually for seven years up to the date of transfer. Like most Private Members’ Bills, this proposal hasn’t made a great deal of progress, although it was written up in the press.

Perhaps these problems could be avoided through good advice and better financial planning? But then this is of course where we begin to enter dangerous territory. Should two elderly sisters sharing their family home need to use a trust to avoid IHT, or should they be able to rely on a fairer tax system that will allow the sole survivor to carry on living in their home until they die or chose to move on? Of course, life insurance to cover IHT on an estate could also be a way to mitigate the risk of being ejected from the family home. But once again, the ordinary person who doesn’t usually need tax advice may not realise that they are at risk.

In the 2017–19 parliamentary session, only four Private Members’ Bills were passed but none concerned tax, so these are not going to be the most effective way to improve the law. The OTS does its best to put forward suggestions for tax simplification, the professional bodies and tax reform groups respond to consultations and point out where tax policy suggestions are flawed, where draft legislation doesn’t work as intended or where HMRC guidance is wrong or deficient. We may struggle a bit with fairness because we speak for such a diverse membership, but on most measures of what good tax policy looks like, we can agree. 

Time for fairness?

Now here we are with a new government, a possible five-year term and a workable majority. So it is time for a better performance please, people; better listening will make better tax law. Consult on new ideas early. We aren’t talking about special pleading or lobbying, but we do want fairness, and while we are about, it don’t forget the other nine of our Ten Tenets for a Better Tax System.

About the author

 Anita Monteith, technical lead and senior policy adviser at the Tax Faculty