The independent Office of Tax Simplification (OTS) has published a call for evidence to gather information about people’s experience and perceptions of Inheritance Tax. The consultation is focusing on the ease or complexity of the legislative rules and the processes that have to be followed.
Expert lawyer Lisa Davies provides specialist legal advice to private clients on inheritance, wills and tax planning. In this article (which first appeared in Lexis Nexis on 11 June) she shares her thoughts on the consultation and whether this will be a catalyst for positive change.
What is the background to the Inheritance Tax consultation?
The Office of Tax Simplification (OTS) is part of HM Treasury and gives independent advice to the government on simplifying the UK tax system. In April it published a call for evidence aimed at individuals, professional advisers and representative bodies, to gather information about people’s experience and perceptions of Inheritance Tax (IHT). It also launched an on-line survey – the first directed specifically at the general public – intended to ascertain their experiences of dealing with IHT and identify concerns they may have about the tax.
The purpose of the consultation is to consider opportunities for simplifying both existing legislation and the administrative processes by which taxpayers interact directly with HMRC in relation to IHT.
What main areas of difficulty or complexity does the call for evidence suggest might be in need of reform?
There are a number of key areas identified as potentially requiring reform. These include problems in navigating and completing the IHT forms and issues with the guidance available; as well as those related to payment and reporting deadlines.
Respondents are asked about practical difficulties arising from the current instalment payment option process and whether the compliance and disclosure requirements for valuing estates and determining whether IHT is due (such as when an estate is below the Nil Rate Band (NRB), or where the spouse exemption applies) are proportionate. There is an emphasis on reducing the anxiety of the general public around IHT, especially amongst taxpayers who may not have a liability, but do not realise this.
On the more technical side, there are questions about the interaction between tax thresholds and exemptions as they relate to lifetime gifts, probing the difficulties in understanding and applying the rules for both practitioners and the public.
Similarly, respondents are questioned on the impact of the current IHT legislation, with reference to the rules around BPR (Business Property Relief) and APR (Agricultural Property Relief), on the business and farming communities and to comment on whether the tax rules affect decisions regarding structuring and disposing of businesses, succession-planning and downsizing.
Finally, there is a question probing the extent to which the charitable exemption and lower rate of tax on death is understood, and a general call for comments on how the IHT system should be reformed more widely.
What are your predictions as to the responses to the call for evidence?
Given the enduringly unpopular nature of IHT with the public (59% of respondents to a recent YouGov poll answered that they felt IHT was unfair) and the frustrations that professional advisors increasingly feel following recent changes including the introduction of the Residence Nil Rate Band, I imagine that the responses received will be resoundingly in favour of serious reform.
I would predict that the RNRB is going to be one of the areas most commented on, as it is often cited as being unnecessarily complex. This may also be an area that is more easily reformed (or perhaps repealed?), being new and less entrenched than other exemptions and reliefs that are relied upon in estate planning.
That said, the consultation specifically queries the impact of APR and BPR on taxpayer behaviour, suggesting this is an area under scrutiny. Whilst many may view these reliefs as reasonable where they protect independent farmers and small businesses, they may be less widely accepted where the tax relief is available for assets acquired purely for tax purposes, such as AIM shares, or where there is no relationship between the shareholder and the companies.
What will be the next steps once the responses from the call for evidence have been reviewed?
The process started with a scoping document released last February, followed by the call for evidence and on-line survey published in April. The closing date for responses is 8th June 2018 and the OTS is expected to publish their report in Autumn 2018. Responses can be given by email or directly on-line via the gov.uk website.
The overhaul of the UK tax system is arguably overdue. Certain measures, such as the introduction of the RNRB, seem politically-driven and have merely papered over cracks in the IHT regime.
IHT is arguably both pernicious and not especially effective. Receipts rose steadily until 2007-08, but revenue then dropped sharply following the introduction of the Transferable Nil Rate Band in 2007 and a fall in residential property values in 2008 and 2009. Receipts increased again, with a substantial rise in 2015-16 due to increased asset values and a higher number of deaths at the end of 2014-15 compared to the same period in previous years. However, we can expect a further slowing down following the introduction of the Residence Nil Rate Band – which gives us the headline potential combined tax threshold for a couple in the UK of £1 million from 2020, meaning fewer estates will be taxable.
This issue has been high profile for some time, with a number of organisations producing reports on the subject – and all calling for reform.
The Resolution Foundation is an award-winning think-tank founded in 2005 with the purpose of producing research and analysis and developing policy solutions to challenges facing low to middle income groups. They have produced a paper entitled “Passing On” published this month, which considers options for reforming IHT. Amongst the ideas set out in the paper, they advocate replacing IHT with a Lifetime Receipts Tax which would apply at a rate of 20-30% to an individual’s cumulative receipts (excluding small gifts and transfers between spouses), to the extent they exceed a Lifetime Receipts Tax Allowance of £125,000. The foundation suggests that this would exclude the majority of inheritances and be fairer and more profitable for the Exchequer in the long run.
Equally, the Fabian Society (Britain’s oldest political think-tank, established in 1884) published a report in 2015 in which they stated, “Inheritance tax is too toxic to save and should be scrapped entirely. In its place gifts, bequests and other transfers should instead be taxed as income, at the recipient’s marginal rate.”
We can only hope that this consultation, requested by the Chancellor of the Exchequer and the Financial Secretary to the Treasury, will be the catalyst to meaningful and much awaited change.
 Source: YouGov poll for Red Box – “How fair or unfair do you think the following types of taxation are?”
 Source: HMRC TAX & NIC RECEIPTS – Monthly and annual historical record 21st March 2018
 UK Social Policy Think Tank of the Year (2015), UK Think Tank of the Year (2013), and UK Social Policy Think Tank of the Year and Publication of the Year (2012). (Source: Resolution Foundation)
 Source: “The Tax Detox” by Daisy-Rose Srblin published December 2015
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