OTS publishes its first report into review of Inheritance Tax

This report outlined the findings and recommendations of the consultation addressing administrative issues of the IHT system. The second installment of this report is due is Spring 2019 when the controversial changes in probate charges are also due to come into effect.

Currently only 5% of estates actually have to pay IHT. But of the 570,000 people who die in the UK each year, around half of their families have to fill in IHT forms – many to conclude that no IHT is to be paid. The report found that 38% of people spent 50 hours or more on the IHT paperwork and felt they had to provide a significant amount of information even though no IHT was payable.

Although the headline IHT rate payable is 40%, the actual rate paid peaks at 20% falling to 10% for larger estates fuelling the belief that the very rich do not pay their full share of IHT. .

Inheritance Tax has been said to hit the middle classes most heavily as a percentage with “up to 20% [tax paid] for estates valued at £2 to £3 million… peaking at just above 20% for estates valued at £6 to £7 million, after which it falls to 10% for estates with a value of £10 million or more.” There is also the feeling that people are taxed twice on their earnings.

The make up of a person’s wealth affects the estate’s eligibility for exemptions and reliefs - a modest estate made up of cash and residential property attracts far less relief than a higher value estate which will typically contain proportionally less cash and residential property and more securities and assets that will attract relief. The OTS point out that “on average more than 70% of the value of an estate worth more than £10 million is covered by reliefs.”

The report details many problems with the current system:
• complexity of the tax and the forms themselves;
• the forms needing to be filled out by all who want to obtain probate regardless of the value of the estate;
• tax free limits on gifts have effectively been frozen for many years;
• the unfairness of fewer reliefs available for those without spouses and/or children;
• the wealthy not paying IHT due to better access to advice on reliefs and exemptions;
• poor functionality of the current digital system;
• poor communication and lack of payment and IHT100 form receipts; and
• inconsistent and conflicting guidance across official sources throughout the process.

In response, the OTS’s report makes the following key recommendations:

• The Government should implement a fully integrated digital system for IHT, including the ability to complete and submit a probate application at the same time.

• The introduction of a very short form for the simplest estates and updating the conditions that must be met to be able to complete a short Inheritance Tax form.

• HMRC should carry out a general review of its Inheritance Tax guidance to ensure it is clear, consistent and timescales marry up with other requirements in the probate process.

• Issue automated receipts for IHT 100 forms and IHT payments and further refine the recently introduced 12 week response period.

• HMRC should liaise with HM Courts and Tribunals Service on options for streamlining the payment and probate process.

• HMRC should review the requirement for trustees to submit forms when no Inheritance Tax is due, and no reliefs or exemptions are claimed.

• Until a digital system can be implemented, HMRC should make changes to the existing form for lifetime charges and trusts.

Many of these recommendations, especially the digital and guidance elements, will only be successful if it is possible to simplify the currently complicated rules on Inheritance Tax. HMRC started to digitalise the forms in 2014 but four years on the project has been delayed yet again, partly due to the sheer complexity of the rules.

It is suggested that simplifying the rules may have the effect of reducing work for professional advisers and would reduce the trauma and burden which many families feel, often unnecessarily, at a very difficult time in their life. Simplification could also lessen the worries people feel about potential IHT bills before they die.

We will wait to see what Philip Hammond’s approach to ‘death taxes’ will be at a time when the country is also preparing to leave the EU. A busy spring is in store!