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Inheritance Tax review 2018

The Office of Tax Simplification (OTS) received an unprecedented response to its recent review of Inheritance Tax (IHT) and has had to split its response into two. The first part has now been published, focussing on administrative issues. The second part will look at the technical and design issues of IHT. 

Meanwhile, the first report makes some sensible suggestions for improving the processes for reporting and collecting IHT. The OTS heard from members of the public who had struggled with complicated forms and procedures, even where the estate was small and there was no IHT to pay. The report reveals that IHT forms are required for half of all deaths despite the fact that only 5% of estates have any IHT to pay.

The key recommendation is that the government implements a digital system for IHT, integrated with the ability to complete and submit a probate application online. This would require executors to complete a list of questions which would create a tailored IHT return, and so dispense with the need to wade through a myriad of complex forms. However, in recognition of the fact this would be expensive and take some time to implement, the OTS also recommends that HMRC should introduce the following short term simplifications to improve taxpayer experience:

  • Make changes to the current forms to reduce and simplify the administration of estates. This will ideally include introducing a very short form for more of the simplest estates;
  • Review and improve IHT guidance to make it clear, consistent and easy to navigate whilst ensuring that it also remains sufficient for complex estates;
  • Introduce a system of issuing automated payment receipts and refine the response period during which HMRC can raise enquiries;
  • Liaise with the Courts and Tribunals service on options for streamlining the payment and probate process. Suggestions to extend the IHT payment deadline to 12 months following the death to align it with the date for filing IHT forms have been rejected, partly on the grounds of cost to the Exchequer.

The complexity of the form required to report lifetime IHT charges and trusts (IHT100) was also acknowledged and the OTS recommends that this is split up so that there is a simpler and tailored form for each occasion of charge. They also suggest amending the signature requirements for trustees so that just the 'principal acting trustee' would be required to sign. The requirement for trustees to submit forms when no IHT is due and no reliefs and exemptions are claimed should also be reviewed and, again, guidance should be improved along with issuing automated payment receipts and enquiry timescales.

We will have to wait until next spring for the second report which will focus on more substantive aspects of the tax itself. It will include a review of the residence nil rate band, lifetime gifts and Agricultural Property Relief (APR) and (Business Property Relief) BPR (including furnished holiday lets, joint ventures and limited liability partnerships), although the focus will be on the practical application and complexity of these reliefs rather than suggesting major changes to the reliefs themselves. In addition, it will consider the practical operation of the reduced rate of IHT available when 10% of an estate is left to charity, life insurance products and pensions and technical aspects relating to trusts and the gift with reservation rules. Part two will also consider the case for 'bigger picture' reform such as reducing rates or increasing the nil rate band or even replacing IHT altogether, for instance with a gift tax. That will certainly make for interesting reading when it is available.

December 2018

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