The Office of Tax simplification has issued its first report into simplifying inheritance tax, including a number of recommendations
The report is calling for a simpler form and easier granting of probate for straightforward estates, alongside better guidance and communication. It suggests an official executor status, to make it easier to access information about the estate.
It has highlighted that life would be easier if there was a standard process for accessing information or funds from financial firms.
The report suggests that the ultimate aim should be a fully integrated digital system, like the one for self-assessment, which only requires you to fill out the bits that are relevant to you. This would be a great step forward, cutting complexity and paperwork at a stroke. However, it adds that the current tax framework may be too complicated for a system like this at the moment.
It will address simplifications that could make digitisation work in a second report.
We’ll have to wait for that second report for recommendations of how the rules themselves should be simplified – addressing everything from the size of gifts and the rules surrounding them, to the complexity and inequality of the residence nil rate band.
Speaking about the changes Sarah Coles of Hargreaves Lansdown welcomed the progress but said it would come as little comfort to those mired in the current tax framework:
“This report shines a spotlight on the impact of forcing people through a fiendishly complicated process at a really horrible time in their lives. It’s an area crying out for radical simplification, and the Office of Tax Simplification has some useful recommendations. Simplification is the key to understanding and engagement, so anything that simplifies the process is welcome.”
“It recognises that any long-term solution will be digital and mobile – which could make an enormous difference to executors buried in paperwork and impenetrable manuals. Unfortunately, a fully digital solution isn’t going to see the light of day in a hurry. The system itself may be too complex to digitise at the moment, so the rules may have to be simplified first.”
“Streamlining the process is incredibly useful, but simplifying the rules as well would be transformative. The OTS doesn’t rule this out – it has promised to address all kinds of things – ranging from gifts to trusts and the residence nil rate band. Unfortunately it’s not in a hurry, so before we even see the recommendations on any of this, we’re going to have to wait for a second report.”
“This will come as no comfort to anyone currently mired in the process. You’re likely to hit your deadline for submitting your forms well before we see any material change.”
Let's take a look at the issues and recommendations in detail.
Having to submit a form where no tax is due, not knowing which form to fill out, not knowing how to do it, and having to pay the tax before assets can be sold.
- A fully integrated digital system for Inheritance Tax (like self-assessment) in time.
- In the interim, there should be changes to the current forms, including a new very short form for the simplest estates – and less onerous criteria to qualify for completing a short form.
Guidance on GOV.UK is difficult to navigate, there are gaps, and it is sometimes inconsistent.
- HMRC should review the guidance and ensure it’s consistent and easy to navigate, has links to other relevant guides – including probate and how to pay IHT, and includes worked examples, a road map, timescales and a tax calculator.
Communication can be poor – although it recently introduced rules that any questions about information on the form will be asked within 12 weeks.
- HMRC should issue automated payment receipts.
Probate isn’t granted, and assets can’t be distributed, until the IHT is paid and the forms submitted. IHT must be paid within 6 months and the forms completed within 12. The report explored changing the deadline for forms to 12 months, but said it wouldn’t solve the problem, and would be costly for the exchequer.
- Explore possible solutions with HMRC and HM Courts and Tribunals Service. Probate could be granted, for example, on very low value estates after submitting very simple forms, or there could be an official executor status granted, to help people access information about estates.
IHT at other times
IHT is also charged in specific circumstances during your lifetime, including where trusts are used. It requires a complex form (signed by all the trustees) even when there’s no tax to pay.
- The digital system for IHT should also cover lifetime charges and trust charges. HMRC should consider whether a form must be filled where no tax is due and no reliefs are claimed.
- In the interim, the form should be simplified, guidance should be included, and trustee signature rules should be less demanding. HMRC should also issue automatic receipts and consider introducing a set period during which any queries will be raised.
Matters beyond IHT
Some issues emerged outside the issue of simplifying IHT. The report highlighted it would be helpful to have guidance for other tax matters for estates – including capital gains tax and income tax.
It would also help to have a standardised process for banks and other financial institutions to allow executors to access information or to release funds.
It added that regulating the will writing market would help improve the administration process.
Issues for the second report
- Complexity of the residence nil rate band (including the downsizing rules) – and inequality for those without children or a property.
- Complex gift rules – especially the tapering of gifts given in the seven years before death, and maintaining records of gifts.
- The size of gifts – which hasn’t kept pace with inflation.
- The rules around giving a gift but still benefitting from the asset.
- Complex operation of the reduced rate of tax when enough of the estate is given to charity.
- The administration of life insurance and pensions.
- Technical aspects of trusts.
- The rules surrounding gifts of business assets – especially as they vary for different sorts of businesses.