The Chancellor wrote to the Office of Tax Simplification (“OTS”) on 19 January 2018 to ask them to carry out a review of inheritance tax (“IHT”). A scoping document for the review will be agreed and published in due course. The OTS gives independent advice to the government on simplifying the UK tax system and is an independent office of HM Treasury. The Office draws together expertise from across the tax and legal professions, the business community and other interested parties.
The Chancellor says that he wants to hear proposals 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. He hopes that the review will focus on technical and administrative issues within IHT – the process of submitting returns and paying tax due – as well as practical issues around routine estate planning and disclosure. The review will also look at how current gifts rules interact with the wider IHT system and whether the current framework causes any distortions to tax-payers decisions surrounding transfers, investments and other relevant transactions.
From a tax-payer’s point of view, recent years have seen layers of new rules making the system overly complicated. Take for example the introduction of the 36% reduced rate of tax and the “residence nil-rate band”.
The reduced rate was introduced with effect from 6 April 2012 and applies if at least 10% of the net estate is given to charity, reducing the standard 40% rate to 36% across the chargeable estate. The benefit of the reduced rate – after all it is only 4% – is outweighed in many cases by the additional work required to value assets solely for the purposes of the relief. There are more complicated calculations for the reduced rate; you have to decide whether a merger of different components is required, and recalculate if further assets are discovered at a later date. HMRC clearly recognises that for many estates this is not a feasible proposition and they even include in the IHT form IHT430 an election to opt out of the lower rate.
Another example of over complication is the “residence nil-rate band”. This was born out of George Osborne’s headline-grabbing £1m IHT exemption manifesto pledge prior to the 2015 General Election. The rules came into effect from 6 April 2017 applying an additional nil-rate band for those who pass their home to children and descendants under their Will (or on intestacy). The additional nil-rate band is £100,000 currently but rising to £175,000 by 2020/21. However, a taper is applied for estates over £2m so that those with higher value estates will not fully benefit (if at all) from the new allowance. The rules are rife with complicating factors such as the application of the allowance where a deceased has downsized their residence before death; as well as how the value of the estate is calculated for taper purposes (for example, potentially exempt transfers reduce the estate for these purposes, but gifts on death that attract an IHT exemption do not).
One can imagine that as the Government strives to digitise our interaction with Government departments, tax reliefs such as these will be impossible to manage online. A simplification that results in easily understood IHT rules by the public and allows real tax reliefs will benefit all.