Call to modernise inheritance tax collection

Too many people have to fill in inheritance tax (IHT) forms, and the process is complex and old fashioned according to the Office of Tax Simplification (OTS), which says HMRC should revise all of its guidance and look to improve the experiences of those dealing with the tax

Although IHT is payable on less than 5% of the estates (around 25,000) of the 570,000 people who die in the UK each year, up to half of families have to fill in the forms. IHT makes up less than 1% of the total tax raised by the Exchequer. Receipts totalled £5.2bn in 2017/18 and have been steadily increasing from £2.38bn in 2009/10, although this increase is expected to slow in future as the residence NRB takes full effect.

The independent agency said its review, which was requested by the Chancellor in January 2018, attracted an unprecedented level of engagement, both from advisers and the general public. This included nearly 3,000 responses to an online survey, 500 personal emails from members of the public and 100 formal written responses to a call for evidence.

Given the wide scope of the review, the OTS will produce two reports. The first, released on 23 October 2018, is on the day to day matters of concern to all who responded; the second will explore key technical and design issues and will appear in spring 2019.

In its first, 82-page report the OTS says many of those who responded said that, at what is such a difficult time, they felt they were being asked to fill in complicated forms even where the relative who had died had only left a small amount.

Some of the main issues highlighted were that completing the forms is hard, and it can be difficult to work out which form to use; the amount of information required can be disproportionate, especially in cases where no tax is due; the guidance provided can be difficult to navigate; and people would like HMRC to provide receipts for tax payments.

The OTS also received substantial comment on the various thresholds. While it has been suggested that the nil rate band (NRB) is simple and well understood, the residence NRB aimed at helping people to pass on the family home attracted a lot of comments. This is due to its complexity and because those who do not have children, or their own home, may not be covered by it.

Respondents indicated the various gift rules and exemptions for taxing lifetime gifts can be complex and confusing and are not always well understood, especially those relating to the tapering of the tax rate for gifts given in the seven years before death. The financial limits for the various exemptions have not kept pace with inflation, while for many, it is difficult to either maintain or reconstruct records of lifetime gifts.

As regards the forms executors are required to submit, the OTS observed that for many executors, forms cannot be completed and submitted online, and there is no straightforward process to direct taxpayers to the correct form. Although some executors who are dealing with a very simple estate find completing the short form straightforward, many executors find the process challenging, while the amount of information required on the long form is disproportionately high for estates where there is no IHT to pay.

In its recommendations the OTS said the government should implement a fully integrated digital system for IHT, ideally including the ability to complete and submit a probate application. Pending implementation of a digital system, HMRC should make changes to the current forms to reduce and simplify the administration of estates, including introducing a very short form for the simplest estates and updating the conditions that must be met to be able to complete a short IHT form.

Other recommendations include introducing standardised requirements for banks and other financial institutions to release funds prior to probate being granted.

Angela Knight, OTS chairman, said: ‘The recommendations in this report will make it easier for the majority, and would mean that in future, many may not have to do the forms at all. Improving the administration of this tax in these ways is important as having to deal with the current process can seem overwhelming to people at a time when they are both preoccupied and distressed.’

Paul Morton, OTS tax director, said: ‘The key recommendation in this report on the administration of the tax, as with other work of the OTS, is that technology should be deployed to provide a digital solution to transform the experience of those dealing with the tax on a day to day basis.’

Commenting on the first part of the Office of Tax Simplification's (OTS) review into inheritance tax, Gary Heynes, RSM's head of private client said:

'The OTS has highlighted the sheer absurdity of the levels of red tape involved in the administration of the inheritance tax system. This results in 275,000 estates having to fill in IHT forms when only 25,000 are liable to the tax.

'Although we may have to wait for the OTS' second report for a deeper analysis of some of the wider questions around IHT and the specific reliefs and allowances, this report does nevertheless shine a light on some of the anomalies which need to be addressed. This is particularly true for those who co-habit or do not have children and who do not benefit from the same allowances accorded to those who are married or in a civil partnership and/or who have direct descendants.’

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

Report by Pat Sweet

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