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

Tony WickendenThe Office for Tax Simplification has been tasked with reviewing the current rules.

The Chancellor has requested the Office for Tax Simplification carry out a review of inheritance tax.

The main focus of the IHT General Simplification Review will be on ensuring the administration and making payments of the tax is fit for purpose and as simple as possible. The taxpayer’s experience should be as smooth and clear as possible. All laudable aims.

The OTS is to consider how the current rules for gifting interact with the IHT system generally and whether the rules as they stand cause any distortions to decision making in relation to transactions connected with estate planning.

The Chancellor’s letter in January to the OTS seeking the review raises some interesting questions. As a few initial commentaries on this development have suggested, it was less than clear in explaining exactly what he was hoping the OTS would produce.

Tony Wickenden: Do clients know enough about IHT reliefs?

Subsequently, last month, the OTS published a letter setting out the scope of its review, ahead of a call for evidence in the near future.

It aims to publish a report in the autumn with “specific simplification recommendations for the Government to consider”, which will presumably feed into the Autumn Budget.

At this point, it is worth looking back at what the OTS has said about IHT in the past.

In March 2011, shortly after its birth, it published a review of tax reliefs. This contained a section on IHT which highlighted how many such reliefs had been left to wither on the vine. For example, the annual exemption of £3,000 had not been increased since 1981. The OTS noted the contents of the Mirrlees Review, published in 2010, which said IHT was “…a somewhat half-hearted tax, with many loopholes and opportunities for avoidance through careful organisation of affairs”.

The OTS concluded that: “On the basis of the low number of estates caught by IHT and the useful, but relatively low, revenues (after reliefs) that it raises, we consider a more appropriate approach may be to review the whole of IHT rather than to consider individual IHT reliefs. Such a review may also encompass a review of capital gains tax and we envisage this as a longer-term project.”

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In 2015, the OTS published details of a Complexity Index it had developed to compare the relative complexity of legislation and its overall impact. Out of over 107 tax areas reviewed, IHT ranked third in terms of underlying complexity (behind two aspects of CGT) and 38th in terms of the impact of complexity. The relatively lower rating for the second category is a reflection of the small number of IHT payers (only 23,250 estates were subject to IHT in 2014/15, according to HM Revenue & Customs).

File image of alarm clockSince that 2015 OTS review, the labyrinth that is the residence nil rate band and related downsizing rules have been added to IHT legislation, which should bolster its underlying complexity score. Of course, that is not good news for taxpayers seeking to understand the levy but it does mean that planning to understand, reduce and provide for the tax is an area on which individuals need advice.

The delivery of value by advisers will start with making individuals aware of how the tax and appropriate reliefs work so they can get an appreciation of whether they have an IHT challenge and, if so, what to do about it.

IHT is due to yield £5.7bn in the coming tax year, so there is no likelihood of it disappearing. What will be interesting to see in the terms of reference is how far simplification will be allowed to stretch to wholesale reform of a tax that has its roots in the 1970s and early 1980s. I, for one, will be following developments with a great deal of interest.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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