IHT – how the rules could get simpler
Dec 07, 2018
Many of us, even if we’ve not actually had to suffer going through the process, will be aware that the UK’s current inheritance tax (IHT) system is fiendishly complicated. In order to reduce the extent of this painful procedure, the Office of Tax Simplification (OTS) has released a report in which it makes a number of recommendations to improve the situation for bereaved families, which includes moving to a fully digital system for IHT.
Why the current IHT process needs to change
The administration associated with losing a loved one is onerous. Figures suggest that 38% of those people who don’t use an adviser spend 50 hours or more providing information to HMRC for inheritance tax purposes. And the galling thing is that for the large majority, there is no tax owed anyway. In 2017, 275,000 executors had to file IHT forms, but only 25,000 of them had to pay any tax – that’s fewer than 10%.
The problem is that probate can’t be granted, and assets from an estate can’t be distributed, until all the relevant IHT forms have been completed. Any IHT due has to be paid within six months, and the forms have to be completed within 12 months.
In order to try and improve this process, the OTS called for survey submissions from the general public, which generated an unprecedented number of responses. Three thousand online feedback forms were submitted, indicating quite how overwhelmingly complex and painful people find the IHT system.
How IHT might be improved
In the long term the main recommendation from the OTS report is to “implement a fully integrated digital system for inheritance tax, ideally including the ability to complete and submit a probate application”.
As moving to a digital system like this will involve a complete over-haul of the current set-up which will expensive and time-consuming, this 82-page OTS report also outlines some short term recommendations. In the first instance it proposes the introduction of a very brief IHT form for the simplest of estates. Some lower value and straightforward estates may even be offered the possibility of obtaining probate without submitting any inheritance tax forms at all.
More generally, the OTS recommended a review of IHT guidance to make it clearer and more concise. There is a significant need for more joined up thinking between different government and tax departments, so that the administrative and payment processes of IHT can be more streamlined.
More work to be done
Along with a requirement to simplify IHT, an imbalance in the amount of tax paid by the extremely wealthy compared to average-sized estates points to another area which needs to be addressed. The OTS report flagged that the largest estates worth over £10m pay only around 10% IHT, while smaller estates pay more like 20%. This situation is totally illogical, and possibly boils down to the fact that the extremely wealthy can afford to pay for expert tax advice to ensure they’re being as tax efficient as possible.
The amount of money generated through inheritance tax has been rising year on year for the last eight years. Despite measures put in place to slow this increase, IHT for 2017/18 stood at £5.2bn, the highest since the tax was first introduced in 1986.
This report from the OTS is just the first part of their IHT review. They will also be releasing a second report, which will focus on the overall design of the system, in the spring of 2019 – so watch this space. If you have any queries or concerns about inheritance tax, then please do contact us for a chat.