The UK’s complex Inheritance Tax (IHT) system could shortly be due for reform depending on the results of a review by the Office for Tax Simplification (OTS). Chancellor Philip Hammond has written to the OTS asking it to review the IHT regime and he said:
“IHT, and the system within which it operates, is particularly complex and I would like to request that the OTS carry out a review. I would be most interested to hear any proposals you may have for simplification to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible.”
By way of background, the OTS is the independent adviser to government on tax simplification. Their consultation opened on 27 April 2018, and the deadline for responses was 8 June 2018. It is expected that a report will be published in the autumn of 2018.
The current IHT system
Inheritance tax is charged at 40 per cent on estates valued at more than £325,000. Anything up to this amount is known as the “nil-rate band” and no IHT is charged on it. An individual’s estate can include property, possessions, money and investments. Couples can pass all of their tax-free allowance on to their spouse or civil partner upon their death, effectively giving them a combined £650,000 IHT threshold.
An additional “residence nil-rate band” enables a couple to pass on a family home worth up to £1m to their direct descendants without incurring IHT liability. This definition includes children, stepchildren and adopted children – but not siblings, nieces or nephews.
It is interesting to note that the current review of IHT comes only two years after the former chancellor, George Osborne, introduced the residence nil-rate band.
So what is the problem?
IHT has been called one of Britain’s most hated taxes. When it was created, it was meant to be a progressive tax that would help redistribute wealth in society, and yet it is rarely much of a burden to the well-advised wealthy. Despite IHT being relatively “avoidable” by the wealthy (only 5% of estates pay IHT), the tax brought in a record £5.2 billion in tax receipts due in part to soaring property prices.
Mr Morton of the OTS said:
“Less than 5 per cent of deaths result in tax being paid; it brings in less than 1 per cent of total tax revenue. But many more people have to fill in these forms following the death of a family member at what is usually a difficult time. We are going to look at whether this could be simplified so it is less arduous.”
What the review will cover
The review covers three broad areas.
1) Practical issues, including how inheritance tax forms are submitted and the administration and guidance available.
2) How the current rules are perceived by taxpayers, professionals and industry bodies. This will cover the various IHT reliefs, including those for businesses, farming businesses and charitable giving, plus current gifting rules that enable individuals to pass on wealth while they are still alive.
3) The impact current IHT rules have on how individuals make investment decisions.
It is interesting to note that despite the review having only been launched for a few weeks, there were a significant number of comments made. Some of the more interesting comments include:
• IHT being described as a “voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”
• Another commentator pointed out the complexity of the process after someone dies. “Even administering an incredibly simple estate, in which one spouse or civil partner passes everything to the other and there is no IHT to pay, can involve hours of complex paperwork, racking up significant fees from professionals, including lawyers and estate agents.
• A final comment warned of the risks of trying to navigate the system without professional help. “Executors who ‘DIY’ probate often think they are saving on legal costs – but in fact, many end up being taxed more.”
There is no guarantee that what the OTS recommends will result in changes to the tax policy, but there is certainly a strong feeling that some change is long overdue.