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The problem with IHT? It’s too complicated!

Author Image Graeme Robb Senior Technical Manager
3 minutes read
Last updated on 18th Dec 2018

Overview

The Office of Tax Simplification has issued its First Report as part of its ongoing IHT review.

In last month’s Oracle, I reviewed a consultation document issued by HMRC titled “The Taxation of Trusts: A Review.”

In this edition, I turn my attention to a report published on 23 November by the Office of Tax Simplification (OTS) reviewing  the related topic of IHT. The title of the Report?

Inheritance Tax Review – first report: Overview of the tax and dealing with administration

What is the OTS and how did we get here?

The OTS is the independent adviser to government on simplifying the UK tax system. The OTS aims to improve the administrative process - which is what people actually encounter in practice - as well as simplifying the rules.

January 2018 – the Chancellor asks the OTS to review admin & technical aspects of IHT

February 2018 – OTS publishes scoping document

April to June 2018 – call for evidence and on-line survey

Why is this just a First Report?

Basically because of the wide scope of the review (it attracted an unprecedented level of engagement from advisers and the general public – more than 3,500 people shared their views).

This First Report

  • Summarises comments and submissions received and sets out recommendations on administrative issues which will remain important regardless of any technical or design changes made in the future.

The Second Report (to be published in Spring 2019)

  • Explores key technical and design issues

Key recommendation from this First Report

“The government should implement a fully integrated digital system for IHT, ideally including the ability to complete and submit a probate application.”

This key recommendation arises from the fact that although less than 5% of people pay IHT, executors have to complete IHT forms for half of all deaths.

The OTS recognise that this will be expensive & time consuming and therefore in the short term it suggests certain improvements to the existing process.

Other than administration, are there any other matters of particular interest?

Yes!

The Report sets out key areas of complexity and expands on views that have been heard by the OTS.

For example the Report highlights concerns regarding the Residence NRB, exemption limits, taper relief and so on. Crucially though the Report does not go into detail, and no recommendations are made on these areas in this report. The views and comments the OTS has received will be considered further and any recommendations will be made in the Second Report. Accordingly, it seems sensible to simply wait and see what is in that second report. For the time being it is however worth noting paras 53 & 54.

3.53

“There are other areas of the Inheritance Tax system that are complex, and the OTS will consider these further. These include the areas listed below:

  • the practical operation of the reduced rate of Inheritance Tax which is available when a certain proportion of an estate is left to charity
  • the administration of life insurance products and pensions and the types of products available
  • technical aspects relating to trusts for example exit charges and the 10 yearly charges
  • the rules around reservation of benefit

3.54

While some of these areas will only be relevant to a small number of people, others, such as pensions, will be relevant to a larger number. There are both administrative and legislative complexities in these areas.”

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