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Inheritance Tax review

Our taxes are supposed to be getting more simple, and inheritance tax is the latest in the firing line. In January the Chancellor made a formal request to the Office of Tax Simplification (OTS) to review IHT (Inheritance Tax), and in February the OTS published a document setting out the review’s scope which suggests a wide interpretation of ‘simplification’.

Kelly Greig, tax partner, says: “The OTS is concerned with long term, good improvements to tax law, rather than political change, but any changes to IHT would need legislation that may be difficult at present. The OTS had in fact been reviewing IHT for about 3 months already.”

Substantive changes to tax law may not command a majority in this parliament, so genuine simplifying measures are more likely to get through - but with any tax change there are winners and losers.

Kelly says: “One of HMRC’s current buzz phrases is ‘improving the customer journey’. They are keen to show they have made things easier for taxpayers.”

So the basic reporting process, the way people report and pay tax, is an easy target for simplification. But so too is the process for applying for probate – getting the right to deal with a deceased person’s assets in their estate, which is the main occasion on which IHT is paid.

Kelly says: “It’s very important that in simplifying the process, they don’t make it easier for people to deny rightful heirs what is due under a will or intestacy. For instance, by making it too easy for someone to get banks to pay out cash to the ‘next of kin’ when someone dies, without a formal grant of probate. This is already a growing problem.”

She goes on: “It’s also crucial that the proposed substantial increases in probate fees to up to £20,000 are not brought back, as that would mean people taking steps to avoid the need for probate and bypassing the IHT payment process which that involves.”

Exemptions are being reviewed. The annual exemption has been at £3,000 for over 30 years and could be increased to say £10,000 in return for taking away the small gifts (£250) and marriage exemptions, and possibly capping the ‘normal expenditure out of income’ exemption.

Kelly says: “The latter might be abolished, but that would be a huge step and would create a real fuss, whereas a cap is quite realistic. There is bound to be some change here – it’s easy to do and not so politically sensitive.”

The OTS also wants to tackle “complexities arising from the reliefs and their interaction with the wider tax framework”. The main reliefs are Agricultural Property Relief (APR) for agriculture property and Business Property Relief) BPR for business property, and the join between the two creates plenty of complications. Farmers’ executors often have to claim both, and the rules don’t always work well.

Kelly says: “A ‘simplification’ here might involve some more controversial elements, including reducing the 100% relief that can be claimed on some let farming land. This is said to distort the value of rural land, and some say is not needed for real working farmers. HMRC are keen to narrow the businesses that can get a substantial relief, but there could be a lot of political objection to change here - from the government’s own backbenchers.”

Another key concern of HMRC is what it calls ‘distortions to taxpayers’ decisions’. Kelly comments: “Some of the distortion comes from the life insurance industry which seems to have great success lobbying HMRC against changes.” She says many insurance based products with an apparent ‘reservation of benefit’, which would normally disqualify them for tax advantage, appear to get clearance from HMRC. The OTS plans to take evidence in the spring and publish a report in the autumn.

 Published: 22 February 2018

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February 2018

Key Contact

Kelly Greig