IHT Simplification: OTS First Report

More detail on the recommendations from the OTS First Report on IHT Simplification

As an early Christmas present, the exceedingly generous (and almost hyperactive, in 2018 at least) Office of Tax Simplification (OTS) have published their initial findings and recommendations on inheritance tax (IHT).

The OTS report was published on 7 November, is the first of two reports and is entitled “Overview of the tax and dealing with administration”. The second part, dealing with the more technical issues will be published, say the OTS, in 2019. This second report will deal with most of the representations and issues that will, we think, be of greatest interest to the financial services and financial planning sectors.

The fourth and fifth paragraphs of the Foreword in the report gives a clear indication of the main focus of the report. It reads:

“This first report summarises the many comments and submissions we’ve received. It then sets out recommendations on administrative issues, which featured frequently in those responses, and will remain important regardless of any technical or design changes made in the future.

Although less than 5% of people pay Inheritance Tax, executors have to file in Inheritance Tax forms for half of all deaths. So, the key administrative recommendation is for the government to simplify this by giving renewed consideration to digitising and simplifying the necessary administration.”

It’s quite telling that, according to the OTS, out of over 570,000 who die in the UK each year IHT forms were completed in respect of 275,000 estates in the UK in the 2015/16 tax year. And of those 275,000 estates for whom forms were submitted only 25,000 estates in the UK are liable for IHT.

The key objective and guiding goal of the OTS is to make recommendations for the simplification of tax. It is not to comment on or make recommendations related to tax policy but only to focus on simplifying the operation of the tax for the customer, aka the taxpayer. That guiding principle is very evident in their first report on IHT.

With the administration of over 250,000 estates having to complete IHT returns (the lengthier IHT 400 and the shorter IHT 205) but only around 10% of these estates (5% of all deaths) resulting in an IHT liability it is unsurprising that the OTS think that this situation could be improved and that it falls squarely within their remit to make appropriate recommendations.

As important contributory/supporting recommendations, improving the forms that are currently in use, enhancing guidance and enabling greater efficiency, clarity and simplicity by appropriately deploying digital solutions also feature in the OTS recommendations.

Key recommendations:

  1. The Government should implement a fully integrated digital system for IHT, ideally including the ability to complete and submit a probate application.
  2. Pending implementation of a digital system, HMRC should make changes to the current forms to reduce and simplify the administration of estates, including introducing a very short form for the simplest estates and updating the conditions that must be met to be able to complete a short IHT form.
  3. HMRC should carry out a general review of its IHT guidance with the aim of it being:
    • Targeted to reduce concern for those who worry unnecessarily;
    • Clear, consistent and easy to navigate;
    • Linked or located with other relevant guidance, including probate;
    • Expanded to include worked examples, a road map, timescales and a tax calculator.
    • In line with some other taxes, HMRC should also consider increasing the use of other education channels such as webinars.
  4. HMRC should introduce a system issuing automated payment receipts and, if necessary, further refine the recently introduced 12-week response period, during which any enquiries into the information contained on the form will be made.
  5. HMRC should liaise with HM Courts and Tribunals Service on options for streamlining the payment and probate process.
  6. HMRC should review the requirement for trustees to submit forms when no IHT is due, and no reliefs or exemptions are claimed.
  7. Until a digital system can be implemented, HMRC should make changes to the existing form for lifetime charges and trusts. These include:
    • splitting up the current form so there is a simple and tailored form for each occasion;
    • improving the guidance available for completing the form and calculating the tax; and
    • aligning the signature requirements for trustees with other parts of the tax system.
  8. HMRC should introduce a system using automated receipts for IHT100 forms and IHT payments made alongside the form and consider introducing a review period during which an enquiry into the information contained on the IHT100 form will be initiated.