The much anticipated (by some, at least) Inheritance Tax Review: second report by the Office of Tax Simplification (OTS) has now been released. The first report delved into the complexities surrounding the administrative burden of inheritance tax (IHT) reporting. It finished with the promise that the second report would focus more on the technical aspects of IHT.

Well, it has certainly delivered on this promise. In 106 pages, 12 chapters and 5 annexes the report delves into the various rules and reliefs surrounding the current IHT regime, making eight recommendations for simplification and clarification.

Of the many areas covered by the report, three were subject to the closest scrutiny:

  1. IHT in conjunction with lifetime gifts, including exemptions, reliefs, and the liability to pay IHT on these gifts;
  2. the interaction of IHT and capital gains tax (CGT), with a focus on the disconnect between the two types of capital tax; and
  3. IHT on businesses and farms, again with a focus on the differences in the rules when applying reliefs in connection with IHT and CGT.

Among other areas considered, the lack of clarity on the interaction between anti-avoidance legislation and the pre-owned asset tax was criticised, while George Osborne’s residence nil-rate band was identified as being disproportionately complex in relation to the savings it achieved. The lack of available information and guidance on the applicability of IHT to life policies was highlighted as an area to be tackled, and a general lack of understanding regarding charity reliefs should also be addressed by policy makers.

The changes suggested by the OTS in its second report are quite far reaching, and would result in some people needing to undertake in-depth reviews of their wills and succession planning in order to achieve the results they want. This is recognised, although the OTS is adamant that this should not scare policy makers away from implementing its suggestions. Radical changes have been made before, says the OTS, so why not again?

One thing is clear in respect of the changes: nothing will happen quickly. This is even before taking into account the current political uncertainty which means that IHT legislative change is unlikely to be top of any political manifesto. The OTS makes it clear in its report that when/if legislative changes are made, sufficient opportunity will need to be afforded to those affected to allow for the review and amendment of succession planning strategies.

In summary, the general theme of OTS’s second report is that the current system is overly complex, lacking transparency and clarity, not accessible to a lay executor, and guidance is hard to come by: a fairly damning summary. The recommendations provided by the OTS are aimed at tackling these main issues, while maintaining or improving current revenues. It will be interesting to see how the government will respond, although assessment and implementation may be some time coming.

If you require advice or assistance in respect of the administration of a deceased person’s estate, your own IHT or succession planning or in writing a will, please get in touch with us.