22 May 2019

Tax made simple?

By Miranda Marshall, Director, Hayes + Storr.

The very title The Office of Tax Simplification (OTS) has a Monty-Pythonesque ring to it. It does exist and published Part 1 of its Report on inheritance tax (IHT) in November last year. The second report is due any time now. The OTS’s review attracted an unprecedented level of engagement from both the general public and professional advisers and showed IHT as almost uniquely unpopular. In a 2015 YouGov survey, IHT was the most hated of the 11 major taxes, with 59% considering it ‘unfair’ and only 22% ‘fair’.

Fewer than one in 20 people pay IHT when they die, but IHT forms have to be sent to HMRC on half of all estates. It seems likely that an online portal, rather like self-assessment income tax, will replace the current paper IHT forms. The online system would be ‘intelligent’ and sections of the forms would expand to meet each matter, as appropriate.

On low-value estates, the new system would require only a rough estimate of the value of the assets and it might be that the probate court and HMRC forms are combined.

Current IHT guidance comes from 4 separate government sources; it is inconsistent and full of discrepancies. The OTS wants to improve it and make it more user-friendly, targeted and consistent. Tax–calculations and automated receipts would be built into the system.

The OTS is suggesting that banks and other financial institutions standardise their practice. The current lack of consistency includes cases where the banks have released large sums of money to ‘next-of-kin’, even where they are not executors or beneficiaries of the Will, with funds, therefore, going to the wrong people.

The regulation of unqualified Will-writers is high on the agenda, especially as there are no complaints service and little redress for negligence or similar.

Other points worth noting in the review relate to lifetime gifts, as the wealthy can give away most of the estates during their lifetimes and pay less IHT than those who need their assets to live on. Annual and small gifts exemptions have not increased for 30 odd years and at least an inflationary increase is long overdue. IHT ‘Taper Relief’ is misunderstood by the public who expect it to benefit all lifetime gifts.

IHT has become difficult to navigate. It has evolved over time and is a combination of Death Duty, Estate Duty, pre-1984-Capital Transfer Tax, with additional anti-avoidance provisions bolted on. The original policy objectives are often unclear.

The OTS’s suggestions include: replacing IHT totally with a Gift Tax; introducing lower and/or graduated rates, or increasing the size of the Nil Rate Band, so as to replace some exemptions; and, the interaction of IHT reliefs with other taxes to create a wider tax framework. Distortions arise in planning and decision-making because of historical anomalies, such as people not making lifetime gifts and holding on to assets, because Capital Gains Tax gets ‘washed out’ on death.

Whether the changes happen is a matter for the Government, who have had other priorities for too long now. The OTS will deal with that in Part 2 of its report.

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek our specific advice.

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