28 Nov Inheritance Tax Review – first report dealing with administration
The Office of Tax Simplification (OTS) has published the first stage of its review of the Inheritance Tax system, which focuses on administrative issues, rather than the principles of the tax and its reliefs. The OTS acknowledges that the review has attracted an unprecedented level of interest and the report is based on more than 3,500 submitted comments.
The report notes that there were 588,000 deaths in the UK in the tax year 2015 to 2016 and an Inheritance Tax form was completed by just under half of these, which is a high proportion compared to the 24,500 estates on which Inheritance Tax was actually payable. The OTS concludes that too many people have to fill in Inheritance Tax forms with the process being complex and old-fashioned.
The key recommendation is that a fully integrated digital system for Inheritance Tax should be implemented, ideally including the ability to complete and submit a probate application. However, the report acknowledges that this is a long-term ambition and that pending implementation of a digital system, HMRC should make changes to the current forms to reduce and simplify the administration of estates.
If HMRC can find the resources to implement these recommendations (given the ongoing work that will be required for VAT with Brexit and Making Tax Digital), this will be welcome. However, the OTS note that we have been here before, as HMRC started a project to put the Inheritance Tax forms online in 2014, but in April 2018 announced that the digital transformation of Inheritance Tax would be delayed, along with several other projects.
A second report, covering wider areas of concern, will follow in spring 2019. However, chapter 3 of this first report details areas of complexity which should be covered, with the following points being noted:
- Trusts and gifts with reservation of benefit
The OTS will consider other aspects of Inheritance Tax including what, if anything, could be done to simplify the technical aspects relating to trusts and the rule around making a gift, but enjoying a benefit from the assets given away.HMRC issued a review of the Taxation of Trusts earlier this month, so it will be interesting to see how the OTS report interacts with this review.
- Business Property Relief – “Wholly or mainly” test
The OTS has heard that the wholly or mainly test can be challenging to apply, with it difficult to determine what percentage of a business will be treated as ‘holding an investment’. For estates, the test is applied on death at a single point in time and this creates uncertainty for business owners as they cannot predict the timing of the test or the relative value of the investment part of the business in the future.
- The “Big picture”
Suggestions have been made about the interaction of the reliefs with the wider tax framework, and the potential distortions that may arise in relation to taxpayers’ decisions about, and the timing of, transactions. One example is in relation to the effect of the Capital Gains Tax uplift on death, especially in situations where Business Property Relief or Agricultural Property Relief apply. Whether to make any changes in these areas is a matter for government. However, in its second report, the OTS will consider these issues in more detail.
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