Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How inheritance tax could be made easier for 250,000 people
Up to 250,000 people each year could avoid the stressful process of dealing with inheritance tax under new plans from the Government.
The Office of Tax Simplification has released the first of its reports into how to overhaul the inheritance tax system in order to make it simpler and easier for people to navigate the process.
The first report focuses on the processes involved in determining whether you need to pay inheritance tax and actually paying it. A second report, due out next year, will look at the allowances, reliefs and gifting rules available under the current inheritance tax regime, and whether they need to change.
WHAT IS IT SUGGESTING?
In this first missive the Office of Tax Simplification has suggested that people should be able to use an online calculator to find out instantly whether they need to complete the longer form for inheritance tax. This is because currently inheritance tax forms are filled in for 275,000 estates but fewer than 10% of these people actually need to pay the tax.
Gary Heynes, head of private client at accountancy firm RSM, says: ‘The Office of Tax Simplification has highlighted the sheer absurdity of the levels of red tape involved in the administration of the inheritance tax system. This results in 275,000 estates having to fill in IHT forms when only 25,000 are liable to the tax.’
The amount of time people spend on completing the inheritance tax process without an adviser is alarming. The Government found that currently 13% of people spend more than 100 hours on the administrative rigmarole associated with inheritance tax, while 90% of people spent 10 hours or more.
The Office of Tax Simplification has suggested an online portal for inheritance tax, similar to the current system for self-assessment of tax. It suggests a list of tick-box questions that help to complete the form and an online system that allows payment and generates reminders and receipts.
However, the Office acknowledges this will be time-consuming and expensive to create, so we’re not likely to see the system in place soon.
In the meantime it calls for a simple online system to determine whether you need to file the inheritance tax return, and very short forms to make it easier for those with small estates. It has also called on HMRC to have more guidance available to help take people through the process, including a step-by-step guide.
HOW MUCH EACH ESTATE PAYS
While the rate of inheritance tax is 40% on anything above the nil rate band, of £325,000, figures in the Office of Tax Simplification report show that the average rate paid by estates is actually 20%. But this average figure masks vast differences, based on the size of the estate.
The report highlights that the wealthiest families are paying less tax than the middle class, with estates worth £10m or more paying an effective 10% tax rate, compared to a 20% tax for those with smaller estates of £2m to £3m.
This is partly down to the fact that the wealthiest families get professional advice to set up trusts and make full use of the allowances, while those with smaller estates do not.
However, it is also because a greater portion of larger estates are covered by a relief. While smaller estates are largely made up of cash and residential property, larger estates have a greater proportion of business assets that qualify for reliefs. For example, holdings in shares listed on London’s AIM market or unlisted business holdings that qualify for business property relief, or assets that qualify for agricultural property relief.
RESPONDENT'S MAIN AREA OF CONCERN
As part of its review the Office of Tax Simplification called for opinions from the public. Here are their main concerns, which will be covered in the next report:
1. The nil rate band is understood by most but the residence nil rate band, which was introduced last year and gives an additional inheritance-tax-free allowance for family homes, was branded as complex and having flaws.
2. The rules around the amount you can gift to people each year and over your lifetime without inheritance tax being due are ‘complex and confusing’ and the level of gifting allowed should be increased. In particular, people said that the seven-year rule on gifting, where the inheritance tax due in the event of the donor’s death reduces each year since the gift was made, is complex and not easily understood.
3. The rule around agricultural property relief and business property relief are not always consistent, and don’t account for businesses structured in different ways – such as joint ventures and limited liability partnerships.
4. More broadly, people questioned why inheritance tax is so difficult to navigate, and what the thinking is behind some of the reliefs and the system as a whole.