Tax: Simplifying the design of inheritance tax
By Donald Drysdale for ICAS
10 July 2019
Donald Drysdale, a chartered accountant, chartered tax adviser and trust and estate practitioner, studies the latest report on inheritance tax from the Office of Tax Simplification.
Scope of the review
Early in 2018 the Chancellor of the Exchequer, Philip Hammond, asked the Office of Tax Simplification (OTS) to carry out a review to identify proposals for simplifying the inheritance tax (IHT) regime from both a tax technical and an administrative standpoint.
The scoping document for the review agreed that the OTS should give an initial evaluation of aspects of the current IHT regime and what they mean for taxpayers, HMRC and the Exchequer; identify opportunities for simplification of IHT supported by analysis and evidence; and offer specific simplification recommendations for government to consider.
ICAS submission
In response to a call for evidence, ICAS responded with a submission in June 2018.
This called for improvements in online IHT forms to make them easier for taxpayers and agents to use; clearer guidance on completing form IHT 100; acknowledgements from HMRC for forms IHT 100 submitted; and faster processing by HMRC.
On the rules for lifetime gifts, ICAS called for administrative improvements and simplification. It suggested that this could ease compliance and simplify one area which causes difficulties, without creating uncertainty and unintended consequences.
ICAS also described the residence nil rate band (RNRB) as unfair, distortive and not in the public interest. It said that an across-the-board increase in the £325,000 nil rate band would have been an easier, fairer solution to the perceived problem which RNRB was intended to tackle.
The ICAS submission spoke of Brexit-related uncertainties facing all businesses, including those in agriculture. It said that this was not the time for major reform of agricultural property relief (APR) and business property relief (BPR), although wider reforms were needed in the longer term.
OTS recommendations
The first OTS report was published last November. It recommended reducing or removing the requirement to submit forms for smaller or simpler estates, especially where there is no tax to pay; simplifying the administration and guidance; having standardised requirements for banks and other financial institutions; and automating the whole system by bringing it online.
The second OTS report was published on 5 July.
It suggests the following changes to the rules for lifetime gifts:
- The government should replace the £3,000 annual exemption and the exemption for gifts in consideration of marriage or civil partnership with an overall personal gifts allowance.
- It should consider the level of this allowance and reconsider the level of the £250 small gifts exemption, while also reforming the exemption for normal expenditure out of income or replacing it with a higher personal gifts allowance.
- Taper relief should be abolished. Instead, the 7-year period should be reduced to 5 years, so that gifts to individuals made more than 5 years before death become exempt. The need to take account of gifts made outside that period (what is currently the ‘14-year rule’) should be removed.
- The government should explore options for simplifying and clarifying the rules on liability for the payment of tax on lifetime gifts to individuals and the allocation of the nil rate band.
Where an IHT relief or exemption applies on a death, the OTS suggests removing the tax-free uplift for capital gains tax (CGT). Instead, the recipient could be treated as acquiring the asset at the historic base cost of the person who has died.
The OTS has made several recommendations relating to businesses where BPR or APR may be in point:
- The government should consider whether it continues to be appropriate for the level of trading activity for BPR to be set lower than that for CGT gift holdover relief or entrepreneurs’ relief.
- The treatment of indirect non-controlling holdings in trading companies should be re-considered.
- IHT might be aligned with income tax and CGT, where furnished holiday lets are treated as trading providing that certain conditions are met.
- The treatment of limited liability partnerships should be reviewed to ensure that they are treated appropriately for the purposes of the BPR trading requirement.
- HMRC should review their current approach around the eligibility of farmhouses for APR in sensitive cases, such as where a farmer needs to leave the farmhouse for medical treatment or to go into care.
- HMRC should be clearer in their guidance as to when a valuation of a business or farm is required and, if it is required, whether this needs to be a formal valuation or an estimate.
The OTS wants the government to consider ensuring that death benefit payments from term life insurance are free of IHT on the death of the life assured, without the need for them to be written in trust.
Finally, the report recommends a review of the pre-owned assets tax (POAT) rules and their interaction with other IHT anti-avoidance legislation, to assess whether they function as intended and whether they are still necessary.
Opportunities missed
This second OTS report comments at length on the RNRB, the transferable RNRB and the downsizing addition. These were the most common topics of concern raised with the OTS during the review, and are regarded by many as unfair, discriminatory and excessively complex.
Another area of complexity it explores is the 36% reduced rate of IHT which applies (instead of 40%) if 10% or more of a person’s net estate is bequeathed to charities or CASCs. The OTS received suggestions for simplifying this relief, but has not proposed any changes.
Many taxpayers and tax advisers will be disappointed that the OTS has chosen not to pay closer heed to the concerns raised regarding these complex areas of IHT law, and has not made any recommendations on how to simplify them.
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