Opinions and insights from our private client blog
The OTS releases its first report on the review into Inheritance Tax
- AuthorBen Taylor
The Office of Tax Simplification (OTS) has released its first report on the review into Inheritance Tax (IHT). This first report comments on the administrative complexities of IHT which, surprisingly from a lawyer’s perspective, were the most frequently raised concerns in the responses and comments received by the OTS.
The second report, due to be published in spring 2019, has the aim of investigating and commenting on the complexities of IHT and some of the technical aspects of the tax.
It is apparent from the report that many people are concerned about IHT and how it will apply to their estate, despite the OTS quoted fact that less than 5% of estates in the UK are subject to IHT. Indeed, IHT is seen as the most unfair of 11 major taxes, and the report notes that it was described as complex, stressful and time-consuming.
Whilst there is a perception that IHT applies more often than it actually does, the report shows that there is an increasing number of people subject to IHT and puts this down to increasing house prices and a freeze on the value of the Nil Rate Band (NRB). This has arguably had a disproportionate impact on people, particularly following the introduction of the Residence NRB, which was designed to alleviate the problem, but which is not applicable to everyone. The report notes that this wasn’t missed in the call for evidence, and no doubt we'll hear more about the Residence NRB in the second report.
Further on the application of IHT, the report highlights that how IHT applies to you depends in part on whether you’re married, have children and have business interests (more specifically relievable assets).
In terms of those reliefs, an analysis of HMRC data shows that higher value estates appeared to suffer lower rates IHT, which is put down to increased application of reliefs. Share and securities interests and interests in farm property, for example, appear to make up the vast majority of the value of estates where the estate value exceeds £5-£6 million, all of which may attract Agricultural Property Relief (APR) and Business Property Relief (BPR). This does help with the perception that IHT favours the wealthy, but what should be remembered is that these reliefs were introduced due to the policy that ensuring businesses are affected as little as possible by the deaths of their owners benefits the economy, by not having to break up those businesses to pay IHT. The report suggests, however, that this rationale may be reviewed.
Lifetime gifts have been criticised as too complex and do not seem to be understood by the public. This is unsurprising given the OTS recommendation in this report (and in others) that HMRC review its guidance. There is also a perception that because of the complexities, lifetime gifts, which can help to reduce IHT payable on death, favour the wealthy who can afford to take advice.
In respect of the need to report, the OTS has commented on the fact that whilst only 5% need to pay IHT, just under half of all deaths in the UK in the year 2015-2016 needed to be reported on. One of the principal recommendations of the OTS to help executors is that the government should introduce a fully integrated digital system of IHT reporting. This is unsurprising given the huge focus on "making tax digital" recently. It is recognised that such a service would take time to implement, and so we could be expecting a revision of the IHT forms in the meantime.
The time limit for the payment of tax has also been criticised by the public and professionals alike, noting that the six month deadline is too short, in particular for complex estates where you are forced to make a payment and correct at a later date. The OTS has recommended this process be streamlined, and consideration be given to extending the payment deadline, or perhaps HMRC should consider removing the requirement for an IHT return before obtaining a grant of probate in small estates.
In respect of trustees, the OTS has recommended a review of the requirements for trustees to submit returns when no IHT is due and also that Form IHT 100 (which is used, for example, when reporting a 10-year charge and exit charges from trusts) be reviewed and simplified. The reporting on trusts should also be digitised, which was expected following the introduction of the Trust Registration Service.
The first OTS report is incredibly detailed and offers a number of recommendations and, given that this is only the first half of one of three reviews currently ongoing into issues affecting the IHT regime, I would be very surprised if we don't get a considerable shake-up of IHT in 2019.