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Office of Tax Simplification finds UK IHT regime smothered in red tape

Monday, 26 November, 2018

HM Treasury's Office of Tax Simplification (OTS) has published the first stage of its promised review of the inheritance tax system, focusing on administrative issues rather than the tax itself.

Its call for public comments, launched in January this year, attracted over 3,500 comments, far more than any of its previous reviews, including nearly 3,000 responses to an online survey, 500 personal emails from members of the public and 100 formal written responses. STEP was one of the bodies submitting a response to the consultation, and is widely quoted in the report.

IHT was already known to be one of Britain's most disliked taxes – the OTS describes it as an 'almost uniquely unpopular tax' – but the scale of the criticism surprised even the OTS.

One of the key findings is that the vast majority of people who have to cope with the IHT system do not actually need to pay the tax at all. IHT returns are submitted in relation to about half of all UK deaths, but the tax is payable in respect of less than 5 per cent of deaths. The amount of information required on the IHT400 form is disproportionately high for estates where there is no IHT to pay, says the report. Moreover, payment of the tax can also create cash problems, as it has to be paid before any of the deceased's assets can be transferred by a grant of probate, and the institutions such as banks, with which the deceased's family has to deal, sometimes create unnecessary problems.

The OTS concludes that too many people have to fill in IHT forms, and that the process is complex and old-fashioned. It recommends that:

  • the need to submit forms for smaller or simpler estates should be reduced, especially where there is no tax to pay. A very short form should be introduced for the simplest estates, with an update to the conditions that must be met to submit it;
  • the administration of the tax and the associated guidance should be simplified. There should be worked examples and case studies, especially of situations where no tax is due, along with a step-by-step guide to highlight what an executor needs to do and when;
  • banks and other financial institutions should be made to apply standardised requirements to allow executors to access information or to release funds; and
  • the whole system should be automated by putting it online. The government should implement a fully integrated digital system, ideally including the ability to complete and submit a probate application. HMRC should automate the issue of receipts for IHT payments and further refine the recently introduced 12-week response period, during which any enquiries into the information contained on the form will be made.

None of these insights are particularly new and all have been tried before in varying degrees. But all attempts at simplification have been outpaced by new complexities in the tax. As an example, the OTS cites the residence nil-rate band, which is complex and poorly understood. So too is the reduced rate of inheritance tax available when a certain proportion of an estate is left to charity.

The rules on lifetime gifts and business reliefs are also complex and, especially for the latter, confused and inconsistent. Relief on furnished holiday lettings, joint ventures and limited liability partnerships, and the interaction between agricultural and business property relief, also confuse the public.

A second report, covering wider areas of concern on IHT, will follow next spring.

Sources