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Danby Bloch: Batten down the hatches for IHT review

Office of Tax Simplification report could trigger the biggest upset in estate planning for years

Danby BlochIf you think the biggest threat to inheritance tax planning is posed by Jeremy Corbyn and a possible Labour government, think again. The Conservatives are taking a long hard look at IHT and their aim is simplification.

The Office of Tax Simplification has just issued a consultation document calling for evidence from interested parties, and it is raising some rather more fundamental issues than might be inferred from such an innocuous sounding word as ‘simplification’.

Chancellor Philip Hammond announced the IHT review back in the Autumn Budget. A short scoping paper appeared in February and the consultation itself was published last month.

In its scoping paper, HM Revenue & Customs said the aim of the review was to identify opportunities and develop recommendations for simplifying IHT from both a tax technical and an administrative standpoint.

The OTS is also looking at administrative changes for the vast majority of estates where there is no tax to pay.

Tony Wickenden: Is IHT in line for a shake up?

By the time we get to autumn this year, the OTS should have published a report that will:

  • Provide an initial evaluation of the current IHT regime, and the implications for taxpayers, HMRC and the Exchequer.
  • Identify opportunities for simplifying IHT supported by analysis and evidence.
  • Offer specific simplification recommendations for the government to consider.

Hit list

So, what seems to be on the OTS’s draft hit list based on its call for evidence document?

It starts encouragingly with questions about the IHT and probate processes people who administer estates have to deal with — even though fewer than five per cent of estates are subject to IHT.

These issues include:

  • Problems people encounter navigating the IHT and probate forms.
  • Whether the need to pay IHT before probate is granted creates difficulties. It recognises the advantage of this process for HMRC is that it gets in first and does not need to reclaim IHT from beneficiaries later.
  • Helping people deal with estates where there is no IHT to pay; for example, where a surviving spouse is the main beneficiary.
  • Challenges faced by executors in tracing the financial records of deceased people. Anyone will recognise these difficulties if they have ever tried to establish that a series of gifts were regular, made from income and did not diminish the donor’s standard of living.

The OTS specifically asks about the complications of dealing with people’s lifetime transfers. This includes such issues as determining when a gift was made, whether the donor might have retained an interest, who should be liable for any tax that might become payable, the application of exemptions, and the intricate workings of taper relief.

Cause for concern

So far, so good. But advisers might start to become more nervous around the questions on businesses and business property relief.

Much of the section on IHT and businesses is about the interaction between IHT and capital gains tax: the differences between the rules under which business assets qualify for IHT and CGT reliefs, and the distortions created by the interaction between the two taxes.

Paul Lewis: Time to shake up IHT rules for non-married couples

For example, the absence of CGT on assets passed at death could lead a business owner to postpone passing a business to the next generation until their death, although it might well be more rational to make a lifetime transfer rather than hang on to ownership.

The call for evidence raises the intriguing question as to whether the availability of business property relief should be made dependent on the size of a person’s interest in the business or a minimum holding period by the recipient after death — neither of which is the case now.

Similar issues are raised around the IHT framework for farming. For instance, the OTS questions whether it might be better if agricultural relief and the wider business relief were merged.

The review goes on to question the complications caused by the relatively new provision that reduces the general rate of IHT to estates where at least 10 per cent of their value is passed to charity.

Then, in a wide swipe at the general complexity of IHT, the OTS worryingly asks about any other areas: “You may, for example, wish to comment on the residence nil-rate band, the IHT treatment of trusts, the IHT treatment of personal pensions and life insurance products…” It goes on to ask for general comments and whether we could learn from other jurisdictions.

This could all turn out to be a false alarm. On the other hand, it could trigger the biggest upset in tax and estate planning for years.

Advisers may want to look at clients’ tax arrangements in advance of any possible changes and see what types of planning might be vulnerable.

Danby Bloch is chairman of Helm Godfrey and consultant at Platforum

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