Simplifying inheritance tax - independent review recommends clarity

The Office of Tax Simplification (OTS) has published its second report into simplifying the design and scope of inheritance tax (IHT). Often seen as one of the most unpopular and emotive of taxes, not least because people usually have to get to grips with it when they are feeling at their most vulnerable, the review found significant public misapprehensions associated with inheritance taxation.

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Making inheritance tax simpler – new OTS review published

In January 2018, the OTS was tasked by the Chancellor of the Exchequer with reviewing the operation of IHT and public perceptions of the tax.

  • Consultation process: The OTS undertook extensive consultations with nearly 3,000 members of the public via an online survey, in addition to valuable contributions from representative bodies, professional advisers, academics and other interested parties.
  • Public perceptions: During the consultation process it became clear that much of the public had a limited understanding of the ways in which IHT works. The tax is often viewed as being unfair, overly complicated, counter-intuitive, creating distortions in estates inheritance, and applying more widely to deceased estates than it actually does.

The first OTS report, published in November 2018, made recommendations on the administrative aspects of IHT. It highlighted how very few people are currently within the scope of IHT, with fewer than 25,000 being liable to the tax each year. This equates to less than 5% of all deaths, although ten times as many estates are required to complete and submit forms.

Annual number of inheritance forms resulting in tax being paid:

  • Total UK deaths: 588,000
  • Completed IHT forms: 275,500
  • Forms resulting in IHT payments: 24,500

(Source: HMRC data - tax year 2015-16 actual values)

This second report, published in July 2019, focuses on the main complexities and technical issues that arise from how our tax system functions, and makes recommendations to potentially streamline gift exemptions, changing the ways in which tax works in relation to lifetime gifts to make IHT both simpler and more intuitive, and addresses the distortions in the operation and scope of reliefs, such as those concerning agricultural and business property.

The report lists 11 recommendations to make IHT more understandable and coherent, and also focuses on taxation of lifetime gifts, who pays tax on such gifts, and a review of business exemptions to ensure that they marry up with wider policy goals and are consistent across different tax types.

OTS Tax Director, Bill Dodwell:

'The taxation of lifetime gifts is widely misunderstood and administratively burdensome.'

Key recommendations include:

  • A single personal gift allowance – and consideration on how IHT on lifetime gifts could be further simplified, and the level of small gifts exemptions
  • The seven-year gift period shortened to 5 years – to make record-keeping easier and without the loss of significant tax revenue to the Exchequer
  • Abolition of taper relief – which is complicated, widely misunderstood and is actually only relevant to a small number of cases
  • The removal of the ‘14 year rule’ – which is not widely known about, and is confusing to the general public
  • A review of the interactions between IHT and Capital Gains tax – particularly in relation to certain business property and farmland – as it is complex and currently deters people from passing assets on to the next generation – perhaps with a move over to a ‘no gain, no loss’ transfer basis on death
  • Further evaluation of residence nil rate banding – for those leaving a residence to their direct descendent – which is widely seen as being unfair and complex by many; as it is a relatively new initiative, the OTS is inviting the Government to review this policy in the light of the respondents’ comments obtained during this consultation

Launching the new report, OTS Chairman, Kathryn Cearns, OBE said:

‘Although only a small number of people pay Inheritance Tax each year, a far greater number worry about it.

The OTS’s packages of recommendations would go some way to achieving the goal of making the tax easier to understand and simpler to comply with.’

See also

The finances of bereavement

What executors need to know when selling the deceased's home

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OTS Inheritance Tax Review – second report: Simplifying the design of Inheritance Tax (July 2019)

OTS Inheritance Tax Review – first report: Overview of the tax and dealing with administration (Nov 2018)

The Office of Tax Simplification (OTS) is the independent adviser to government on matters relating to simplifying the tax system, and its work is focused on improving the experience of all those who interact with the tax system – whether they are taxpayers, financial or legal professionals, or official bodies. The OTS aims to improve the administrative processes – what people actually experience with IHT in practice – as well as simplifying the rules themselves.