News | July 16, 2018

The Office of Tax Simplification (OTS) Review of Inheritance Tax (IHT) – Private Client analysis: Ann Stanyer

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Private Client analysis: Ann Stanyer, partner at Wedlake Bell, highlights the key points of the Law Society’s response to the Office of Tax Simplification (OTS) Review of Inheritance Tax (IHT).

Original news

The OTS has published a call for evidence and an online survey to gather information for its review of IHT, which aims to explore simplification around existing IHT legislation and administrative processes. The OTS published its scoping document in February 2018, following the Chancellor’s announcement of the review in January 2018. The deadline for responses to both the call for evidence and the survey is 8 June 2018. A report is expected in the autumn.

What is the background to the OTS call for evidence on the IHT review?

A review of IHT has been on the cards for some time now. The tax derives from its predecessors (capital transfer tax and estate duty) and layers of complexity have been worked in to an already convoluted framework, meaning the tax has not evolved in a consistent or coherent way. Added to that, the tax is unpopular (59% of the public voted that IHT was ‘unfair’ in a 2015 YouGov poll) and generally not well understood by the public. There are also issues with the administration of IHT and the HMRC forms and guidance.

All of this led the government to request, on 19 January 2018, that the OTS carry out a review of IHT in order to identify opportunities for simplification and improvement of administrative processes. The scoping document for the review was published on 15 February 2018 and the call for evidence on 27 April 2018.

What are the Law Society’s main comments and suggestions?

The Law Society’s response is comprehensive and runs to thirteen pages, but some of the main points are as follows.

In terms of administrative processes, they would like to see a streamlined process for the completion of IHT forms (such as form IHT400 used on death, and form IHT100 for trusts) by utilising online automation and form building technology available on HMRC’s website. This is particularly true of the IHT400 with its 20 supplementary forms which can altogether run to 40-50 pages. Possible integration with the existing ‘tell us once’ probate facility is also suggested so that some information can be pre-populated.

An administrative issue that has proved unpopular and challenging for personal representatives (PRs) is the different filing and payment deadlines for IHT on death. The IHT form must be filed within twelve months of death, but payment is required within six. The Law Society supports an alignment at TWELVE months to allow PRs sufficient time to gather information and valuations, and to provide more time for the PRs to raise the cash needed for payment.

The length of time it can take between an IHT form being filed and being dealt with by HMRC is another issue for many practitioners. The Law Society suggests that current response timescales could be published and kept updated on HMRC’s website so that expectations can be managed, and that HMRC acknowledge receipt of all forms with details of a point of contact.

IHT reliefs and exemptions are also covered. The annual exemption has been £3,000 since 1981 and has never been index-linked. The Law Society suggests increasing this to £10,000 and perhaps dispensing with the lesser used exemptions, such as the small gifts exemption and the exemption for gifts in consideration of marriage, in the interests of simplification. They also call for a possible extension of the spouse exemption to unmarried cohabitees.

In relation to the IHT residence nil rate band (RNRB), the Law Society echoes the calls from many in the industry for this to be repealed and replaced with an increase in the standard nil rate band that would benefit everyone and not discriminate against those without residential property or children and remoter descendants. The figure of £450,000 is suggested.

A large part of the Law Society response deals with IHT Business Property Relief (BPR), CGT Entrepreneurs’ Relief (ER) and IHT Agricultural Property Relief (APR). The different definitions of ‘trading’ for BPR and ER is considered but the conclusion drawn is that these do not appear to cause significant complexity given that they deal with different situations. The point is made that if there are to be changes to BPR and/or ER, a long lead in time will be needed to allow businesses to adjust, particularly given the potential challenges of Brexit for UK businesses.

The interlocking nature of APR and BPR for farming businesses is commented upon. It is noted that where both reliefs could potentially apply in relation to the principal farming activity, APR usually takes precedence and it would be helpful if BPR was given priority so as to reduce the need to negotiate on agricultural values.

In terms of CGT gift relief or holdover relief, the Law Society notes that the relief is available on assets qualifying for APR but there is no equivalent for BPR. They question the rationale behind this with a view to possible rectification of the discrepancy.

The IHT treatment of trusts is another significant topic, although the Law Society’s response is brief given the specific review we are expecting in this area as announced in the Autumn Budget 2017. It is suggested that settlors should have more options when creating a trust in terms of the trust’s IHT treatment. The reintroduction of lifetime interest in possession trusts that are taxed as part of the beneficiary’s estate, as opposed to being part of the relevant property regime, is suggested.

Trusts for children after the death of a parent is another simplification area that is identified. The current bereaved minors’ trusts (BMTs) and 18-25 trusts are subject to different tax regimes depending on the age that is chosen and can only apply to children rather than remoter descendants. The Law Society’s recommendation is that the BMT regime is extended to age 25 (as opposed to 18) and made applicable to any child inheriting under a Will. They call for 18-25 trusts regime to be repealed.

When is the OTS response/recommendation due and what do you predict in terms of their
recommendations for IHT reform?

The OTS expect to publish their report in the Autumn of 2018. I would be surprised if they make recommendations for significant IHT reform requiring primary legislation, such as a repeal of the RNRB and/or changes to the taxation of trusts, due to the restrictions on Parliamentary time given Brexit, and also due to the effective hung Parliament. The bigger IHT issues, such as the RNRB, were relegated to the final questions in the call for evidence as an ‘extra’ rather than one of the main areas of focus. My expectation is that the OTS will limit their recommendations to IHT administration and processes which can be changed by HMRC without legislation, and perhaps recommend that the government launches dedicated consultations in respect of the more substantive issues.

(Interviewed by Alex Heshmaty. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.)