Inheritance Tax - Change on the Horizon?
It is now just over a year since Chancellor Philip Hammond wrote to the Office of Tax Simplification, an independent office of HM Treasury, asking them to carry out a review of the Inheritance Tax (IHT) regime. The Office spent much of 2018 investigating and producing its first report, which was presented to parliament in November 2018.
Despite its general unpopularity, Inheritance Tax raised just £3.7bn in the tax year 2014-2015, which is little more than 0.7% of the total tax take for that year. Perhaps then the unpopularity of the tax stems from the general complexity of calculating and paying IHT, along with the myriad forms which executors have to choose from to report the information to HMRC in the first place.
Although only around 5% of estates pay inheritance tax, executors have to complete one type of inheritance tax form or another in all estates. In estates where tax is payable, it is necessary to pay the tax within 6 months of the death and complete the forms within twelve months of death, otherwise the executors themselves can face penalties and interest. The report recognises that these timescales are not always appropriate and has recommended review.
However perhaps the greatest difficulty which executors face when dealing with an estate where tax is payable is that they need to pay the tax before a grant of probate can be obtained. The grant of probate is the document which acts as a ‘key’ to unlocking many of the deceased’s assets. This creates something of a ‘chicken and egg’ situation which can vex executors who are usually recently bereaved and grieving the loss of a loved one.
So against this backdrop it is not surprising that the report seeks to focus on reducing the administrative burden on estates. It is 77 pages long, and goes into considerable detail. The key recommendation was to reduce the work required to complete the forms, especially for very simple estates. By shortening the forms themselves for estates where no tax is payable. Clearly given that an estate must usually run into hundreds of thousands of pounds before tax is payable, it is obvious that there are very, very many estates which are nowhere near paying tax and it does not seem like a worthwhile use of anyone’s time for an 8 page tax return to be required even in very simple cases.
In the longer term, full digitisation of the process is contemplated.
Further criticism was levelled at the guidance issued by HMRC for members of the public completing the forms. The report findings were that some of the guidance was overcomplicated and difficult to understand and apply to less complex situations, and that other parts of it were oversimplified to such an extent that it was of little use.
There is also no response time set out in statute for HMRC to respond to submitted IHT returns, although HMRC has itself recently set out a 12 week response time. This delay has been recognised as causing undue anxiety for executors at an already difficult time, though the 12 week response time is obviously a positive step.
The overwhelming tone of the TS report though is positive, and recognises that through general overhaul of the framework and the use of modern technology, it should be made simpler for grieving families to comply with their legal obligations.
The Society of Trust and Estate Practitioners (www.step.org) has long held the belief that the IHT system is too complicated and has welcomed the first part of this two part report. STEP is especially keen to see whether the notion of further integrating the probate and inheritance tax process is taken further in the second part of the report, which is due in a few more months.