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The first of two Office for Tax Simplification reports - after an ‘unprecedented’ amount of responses

The Office for Tax Simplification (OTS) published the first of a two part report, following its consultation on simplifying inheritance tax (IHT).

Chancellor Philip Hammond wrote to the OTS in January asking for a review of IHT and setting out a number of issues which he would like them to address.

The first report, published on 23 November, outlines proposals for changes to the inheritance tax process following a public consultation which ran from April to June, when it received an ‘unprecedented’ amount of responses. A second report, dealing with the more complex issues where changes are thought to be needed, will be issued in the spring.

Kelly Greig, tax partner and later life planning expert at Irwin Mitchell Private Wealth said: “The OTS report on simplifying IHT, the first of two parts, makes some sensible and positive ideas but they all require action by HMRC at a time where Brexit dominates the headlines and legislative table. It looks like ‘improving the customer journey’, as HMRC puts it, might sit on the shelf until time permits.”

“The more difficult issues, needing even greater ideas to simplify the tax, will have to wait until the second report in the spring. This first report may help the public to understand how inheritance tax works, and it argues IHT is more of worry than it need be for some people. This downplays how urgently reform is needed – for instance, the need to ‘improve the journey’ is shown by about 50% of estates needing to submit accounts whereas only 5% actually pay the tax. That is quite out of proportion and so action is truly needed.”

The first OTS report shows an interesting picture. Estates in the lower millions are paying more inheritance tax than those with a higher value; and showed estates where the majority of the wealth was tied up in property paid more in IHT than larger estates which have diversified portfolios.

As the average price of housing in the UK has risen to heady heights in the last decade, with the south east and London in particular skyrocketing, many homeowners are unwittingly falling into inheritance tax traps.Sarah Paton, a tax expert at Irwin Mitchell Private Wealth, said the largest estates – those worth £10m or more – are almost definitely utilising business property and agricultural reliefs. “Many of the wealthiest individuals in the UK are rich because they have been successful in business. 

“They’re also more likely to have sought legal and financial advice and have structured their estates in the most tax efficient way possible, whether this is through the use of trusts, investing in assets that qualify for business property relief or simply giving money away.”

The contrasting attitude of homeowners is the key difference – they do not consider themselves to be rich on a middle income, but the value of their home pushes their assets wealth to a higher level – and therefore open to more tax.

“The middle earners are likely to be more conservative when deciding how much to give away and/or settle on trust (two of the main tax planning strategies) compared to the super-rich who are more likely to have disposable income and/or capital to fund lifetime trusts or give away.

“We are seeing an increasing number of estates paying tax due almost entirely to the significant value of the family home. The introduction of the residence nil rate band and gone some way to address this but, in London and the south east in particular, many estates will not be eligible for the additional allowance due to the taper threshold of £2m.”

However, there are options available to this new category of wealthy homeowners. Sarah notes trusts are not an exclusive loophole for the rich – they are available to anyone who wishes to open one. “There is a common misconception that you need hundreds of thousands, or even millions, to make it worthwhile setting up a trust. This is simply not the case; a trust can be set up with as little as £1 and the running costs do not have to be significant.

“Many of these middle earners/average people will be able to undertake more tax planning than they might expect but without advice they are unlikely to undertake any tax planning beyond making use of their annual gifting allowance of £3,000. The main reason for this caution is usually a concern about how to fund care if needed.”

Published: 11 December 2019

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December 2018

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Sarah Paton