What should the OTS prioritise in its review of inheritance tax?

What should the OTS prioritise in its review of inheritance tax?

Following the Chancellor calling for a review into IHT, industry experts call for examination of the residence nil rate band, taper relief and taxing trusts

Chancellor Philip Hammond has called on the Office of Tax Simplification (OTS) to review the inheritance tax system and ensure it is “fit for purpose”.

Hammond called the current IHT system “particularly complex” and welcomed proposals that would simplify the labyrinthine rules.

He said the review should specifically look at the technical and administrative issues surrounding the regime, such as the process of submitting returns and paying tax due, as well as practical issues surrounding routine estate planning and disclosure.

He also suggested the OTS look at how current gift rules interact with the wider IHT system, and whether this “causes any distortions to taxpayers’ decisions surrounding transfers, investment and other relevant transactions.”

Is the system fit for purpose?

George Bull, senior tax partner at RSM welcomed the review, explaining that the increasingly complicated system has strayed from its original purpose. While IHT was initially introduced as a tax on the wealthiest individuals, it has now “become a major worry for ordinary people up and down the length of the UK.”

”We believe that, along with a consideration of purpose of the tax, the scope of IHT and the number of people who potentially have to pay the tax should also be reviewed.”

John Bunker, Chair of the Chartered Institute of Taxation (CIOT)’s succession taxes sub-committee, said a review of the IHT system is long overdue. Since modern IHT was introduced in the 19th century, Bunker says “the rules around it have grown piecemeal and not always in a logical fashion.”

Exemptions and reliefs require simplification

“As the scope of inheritance tax has increased, so has its complexity”, Bull explained. In particular, he points to numerous exemptions and reliefs which could use updating or simplification.

He said: “Some exemptions such as the annual exemption, the marriage exemption and the small gifts exemption have not kept pace with inflation. We would like to see these restored to realistic levels so that most people don’t have to worry about them.”

To simplify the complexities surrounding exemptions Bunker suggested the introduction of a larger annual exemption in place of others such as marriage and small gifts.

Bunker also suggested the OTS look at the complex interaction between agricultural property relief and business property relief.

Pre-empting a re-examination of the business property relief, Bull points to a recently published HMRC report, ‘Behavioural evidence around Inheritance Tax and reliefs’. He explained: “The conclusions of this report may signal an expectation in government that the entitlement to business property relief in particular may be curtailed in the course of the current review.”

Residence nil rate band and taper relief simplification

The residence nil rate band, which was introduced by George Osborne, came into force April 2017, and although it may have reduced IHT for many, experts say it adds unnecessary complexity to the regime.

While recognising that this was a manifesto pledge, CIOT encourages the OTS to revisit the nil rate band and determine whether “there are alternative ways of achieving the Government’s objectives without adding so much additional complexity to the system.”

Furthermore, the Association of Taxation Technicians (ATT) encourages the review to examine the interaction between the nil rate band and taper relief.

Under the current system, gifts given in the seven years before you die are taken into account when calculating your estate’s IHT. Such substantial gifts can benefit from a tax reducer known as ‘taper relief’.

Yvette Nunn, Co-chair of ATT’s technical steering group, calls for the system to be simplified, commenting: “Restructuring taper relief so that the gifts themselves were tapered would be much more intuitive to the public than the present method, and open up the benefit of the relief to those making gifts which are less substantial.”

ATT explained: “In the current form, due to the way that the nil rate band works, to benefit from taper relief an individual would generally need to have made gifts of more than £325,000 in the seven years prior to death.”

“As it stands, an individual who has gifted £500,000 four years prior to death would benefit from taper relief, while an individual who instead gifted £50,000 may get no benefit from taper relief if their nil rate band is available to reduce the value of the gift.”

Taxing trusts in relation to IHT

The CIOT also makes the case for simplifying how trusts are taxed in relation to inheritance tax.

Bunker said: “A general review of trust taxation was announced by the Chancellor in the Autumn Budget. How the OTS’s review will interact with this remains to be seen. It is important that both the OTS and the wider review do not lose sight of the fact that most trusts are set up for non-tax reasons such as protecting capital and vulnerable beneficiaries.”

The OTS will deliver its recommendations to the Chancellor in the coming weeks.

The Office has previously provided recommendations on VAT simplification and corporation tax.

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