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Press comment: IHT review reveals fairy tale like tax system

22/11/2018

If you’re covering the first report from the Office of Tax Simplification’s review into inheritance tax, which is due to be released in the next 24-hours, please see the following comment from Rachael Griffin, tax and financial planning expert at Quilter:

"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."

For more information contact

Kathleen Gallagher023 8072 629307990 004932kathleen.gallagher@quilter.com

Notes to editors:

About Quilter plc:

Quilter plc is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.

Quilter plc oversees £118.1 billion in customer investments (as at 30 September 2018).

It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset investment solutions and discretionary fund management.

The business is comprised of two segments: Wealth Platforms and Advice and Wealth Management.

Wealth Platforms includes the Old Mutual Wealth UK Platform; Old Mutual International, including AAM Advisory in Singapore; and the Old Mutual Wealth Heritage life assurance business.

Advice and Wealth Management encompasses the financial planning network, Intrinsic; Quilter Private Client Advisers; discretionary fund management business, Quilter Cheviot; and Quilter Investors, the Multi-asset investment solutions business.

The Quilter plc businesses are being re-branded to Quilter over a period of approximately two years:

• The Multi-asset business is now Quilter Investors

• Intrinsic to Quilter Financial Planning

• The private client advisers business is now Quilter Private Client Advisers

• The UK Platform to Quilter Wealth Solutions

• The International business to Quilter International

• The Heritage life assurance business to Quilter Life Assurance

• Quilter Cheviot will retain its name

This press release is for journalists only and should not be relied upon by financial advisers or customers.

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This communication is issued by Quilter plc.  Registered office: Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ, United Kingdom. Registered number: 6404270.  Registered in England.