"The season of giving is approaching and the Office of Tax Simplification has taken the opportunity to reflect on how wealth flows from one generation to another with its inheritance tax review. Some of the analysis produced by the OTS as part of the review reveals a scenario deserving of a fairy tale where the uber-wealthy sitting in their large estates pay a smaller rate of tax than the average man on the street. However, while inheritance tax is definitely due for an upgrade because it has its roots in the past there is more to the modern-day story.
"This first report identified numerous areas of confusion and complexity around IHT, but the recommendations focused on primarily the administrative burden. These shouldn’t be taken lightly as 70% people spend 10 hours or more on administering the estate and over 12% spend more than 100 hours. Encouragingly the OTS have made what may seem like obvious recommendations. For instance encouraging HMRC and HM Courts and Tribunals Service to allow low value and other simple estates, the possibility of obtaining probate without submitting Inheritance Tax forms, or on submission of a very simple form and suggesting HMRC reviews the bizarre requirement where trustees need to submit IHT forms when no IHT is due, and no reliefs or exemptions are claimed.
"There are also other, somewhat less headline-grabbing, but nonetheless useful recommendations including introducing a step by step guide to IHT, mimicking the learn to drive guidance. However, the meat of the policy changes will come in the second report where we still hope to see some simplicity on the reliefs offered and more flexibility for gifting during the lifetime. The OTS has an opportunity to find a smoother route for the public, removing unnecessary u-turns, stop signs and speed bumps. Because at the moment the current system is basically the same as asking learner drivers to navigate traffic in central London while reciting all the previous cars their parents ever owned.
"Before it starts considering what to do next the government first needs to answer: what is the point of inheritance tax? If its purpose is to tax people based on how much wealth they have then the OTS research revealed in the report is pointing to the necessity of some reform. The research highlights the largest estates, those with £10m or more are paying around 10% tax compared to those with middle to high wealth, who pay around 20%. These figures and the graphs that accompany them will strike many as counterintuitive. It appears we’ve entered an upside down tax regime where the wealthy aren’t paying their fair share.
"There are number of things that are likely to be at play here. First and foremost is the uber wealthy have the flexibility within their assets as they are likely to have more liquidity which allows them to benefit from more reliefs and the power to get advice to help them ensure they are being as effective as possible. In fact, the review highlights that around 70% of the wealthiests’ estates benefit from their relief compared to a £5m or £6m estate where only 40% of the estate benefits from the relief.
"Those with lower to middling wealth are likely to retain their liquid wealth to fund their lifestyle through their retirement, particularly as a substantial part of it will be locked behind the doors of their family home. Figures from the report show that residential property makes up a large proportion of estates of up £7m. We may see these estates get more relief in the coming years as the resident nil rate band comes into force offering estates relief on their property wealth. However, the rules around the RNRB are complicated so there will undoubtedly be some confusion on how and when it can be applied.
"What the figures from the OTS don’t show is how and if families are making use of trusts and how that is impacting their IHT bill as assets which are in trust would not form part of an estate. Trusts are a beneficial tool, particularly in complex situations common in modern families such as second marriages, and it is vital that they remain that way.
"As we await the second and more meaty report form this review we need to keep in mind that there needs to be proportionate reform. IHT makes up less than 1% of the total raised by the Exchequer and so would cover just one weeks’ worth of the cost of tax relief on pensions. It’s undeniably an issue, but government have bigger and more expensive fish to fry."