During the 2017-18 tax year, Inheritance Tax (IHT) raised a total of £5.2bn across the UK, and H M Revenue and Customs (HMRC) believe that a further £600m of IHT slips through its net. These seem like a large figures, but the total IHT received represents only 1% of the total revenues received by the Exchequer each year and equates to sufficient funds to cover the cost of providing UK state pensions and welfare benefits for just one week.
In 2017, there were approximately 570,000 deaths in the UK, with about 275,000 having to complete full IHT reporting. However, only 25,000 estates (5% of all deaths) actually had to pay any IHT. Accordingly, a huge number of Executors are having to undertake full IHT reporting, even though the estate they are reporting on is not subject to IHT. The rationale behind this? Well, it would seem there may not be one.
In January 2017 the Office of Tax Simplification (OTS) was tasked with exploring the issues surrounding the administrative and technical complexities surrounding IHT, and to provide recommendations on how the area might be made simpler for all involved. After conducting in depth consultations with Executors, advisors and interested bodies, the OTS published its first report (there are more to follow) on 23rd November 2018.
IHT in a Nutshell
It is not possible to summarise the IHT regime in any meaningful way here. If you require targeted advice on your own IHT exposure then please do get in touch. Suffice it to say that IHT is generally payable at a rate of 40% on the assets in a person’s estate that exceed that person’s nil rate allowance of £325,000 insofar as this excess value is not covered by another relief from inheritance tax (spouse exemption, transferable nil rate allowance, charity relief, agricultural or business property relief, woodlands relief etc. to name but a few).
While the headline level of IHT is 40%, the actual rate of IHT paid as a percentage of the value of the whole estate in question rises from 0% (where estate do not exceed the nil rate allowance), peaking at just over 20% for estates valued at £6m to £7m, before starting to drop off again. This is due to the numerous IHT reliefs and IHT planning opportunities that are available. On average, more than 70% of an estate worth £10m or more is covered by reliefs. Structuring your assets in a tax efficient manner really can make a huge difference.
The OTS’ Findings
However, navigating the available reliefs, as well as the administrative burden of IHT reporting is a complex and time consuming task. The First Report of the OTS focussed mainly on the administrative complexities facing Executors, whether or not solicitors are engaged to assist them.
The OTS found that the guidance provided by HMRC on calculating IHT, applying reliefs and understanding the various forms was sorely lacking, difficult to navigate, contradictory, outdated and generally not user friendly. The varying deadlines and time limits are confusing, making the penalty system unfair. Communications from HMRC are not subject to deadlines, and no acknowledgements or receipts are issued for the submission of IHT reporting forms. In addition, there is no way to digitally submit IHT returns in Scotland at all, while the availability of digital submissions in England & Wales is limited to narrow circumstances.
A fairly damning summary!
The key proposal of the OTS in its First Report is the introduction of a fully digitised IHT reporting system. Simplification of the reporting forms, a review of deadlines and a drastic overhaul of the available guidance are also recommended. In other words, the OTS suggests a fairly major overhaul of the IHT reporting mechanism.
While perhaps slightly outwith the remit of the OTS, the suggestion that the Will writing market should be regulated is also put forward, on the basis that a correctly written Will reduces the uncertainties, costs, work and administrative burden resulting from a person’s death.
Report 2 – What can we expect?
Report 1 focussed very much on the administrative burden of submitting an IHT return, and the duties this imposes on a person’s Executors. Report 2 promises to examine the more technical aspects of IHT in much greater detail, particularly with regard to the various reliefs available and the need to remove or revise these, and the reporting of lifetime gifts. Aspects of Executry administration ancillary to the immediate management of the deceased’s estate, such as pension arrangements and life insurance, will also be examined.
The tone of Report 2 is expected to be very much one of clarification of the rules, and of the need to ensure that the IHT reliefs reflect business practice and the reality of asset management.
More on this when Report 2 is published.
The IHT reporting process is currently convoluted. No clear timescale for the process is available, and the IHT reporting forms and supplementary guidance are complicated and not particularly user friendly. The OTS in its First Report has suggested improvements that may help the situation, but it’s likely implementation of these suggestions will be a sometime in the coming.
If you require advice or assistance in respect of the administration of a deceased person’s estate, in respect of your own IHT planning, or in writing a Will, please do get in contact with us.