Finally, the inheritance tax system is getting cleaned up – here’s what you need to know
Inheritance tax (IHT) is not a modern phenomenon – in fact, the first “death tax” dates back to the late 1700s.
Since then, IHT has been tweaked and amended, adding layer upon layer of rules. Now, in 2018, we’re caught in a system that is ridiculously confusing, riddled with legacy issues, and in desperate need of reform.
Indeed, nothing screams complexity like a government office that is dedicated to overhauling UK tax rules, which is precisely the role of the Office of Tax Simplification (OTS), launched back in 2010.
The most tangled set of UK tax rules are those that surround IHT. And it’s such a big job that the OTS is working on not one, but two reports containing recommendations for reform.
The current system is basically the same as asking learner drivers to navigate traffic in central London
Last week, the OTS published the first of these reports – an 82-page document outlining how and why the system needs to change.
So let’s look at some of the main takeaways.
Let’s get digital
It’s quite clear that, if IHT is to be brought into the twenty-first century, it needs to move away from the clunky paperwork of yesteryear and have a digital makeover.
One of the key recommendations from the OTS is to “implement a fully integrated digital system for inheritance tax” that is similar to the tax self-assessment process.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “The OTS recognises that any long-term solution will be digital and mobile – which could make an enormous difference to executors buried in paperwork.”
But unfortunately, a fully digital solution isn’t going to see the light of day anytime soon, because the report highlights that such a change will take time and be expensive to implement.
As Coles adds: “The system itself may be too complex to digitise at the moment, so the rules may have to be simplified first.”
When a loved one dies, the last thing you probably want to face is a wall of paperwork. And yet, unfortunately, that’s exactly what happens, with some people claiming that the burden of form filling is a tax in itself.
Part of the problem is that people are often confused about which form to fill in, and there is no straightforward process to direct taxpayers to the correct document. Some forms also ask for huge amounts of information and are time-consuming to complete – at which point, some executors risk missing the deadline.
The OTS has therefore proposed that, pending the implementation of a digital system, current forms should be made easier, while a new “very short form” should be introduced for low-value or really simple estates.
At the moment, some trustees need to submit forms, even though no IHT is due, and where no exemptions or relief are being claimed. Rachael Griffin, tax and financial planning expert at Quilter, says that it is encouraging that HMRC could review such a “bizarre” requirement.
Let it flow
Unless you’ve been responsible for managing someone’s estate before, you’ll probably be unfamiliar with the IHT process. You’d think, then, that the government would make it easy for people by providing a kind of manual which outlines the various steps they need to take – along with some working examples.
But alas, such a manual does not exist.
Even the OTS report states that “the guidance is a complex web of linked pages with no clear ‘route map’ to guide the user”.
The OTS has recommended that HMRC creates a flow-chart similar to that successfully used by the government’s “learn to drive” guidance.
It’s incredible that such a thing doesn’t exist already, but there’s no question that this will help aid those who are stressed and struggling to wrap their heads around the complex web of rules.
Communication isn’t just about providing materials to guide people, it’s about improving correspondence with the tax office.
According to the OTS report, once people submit their forms, months can pass before they get a response from HMRC (if they even get a response at all, that is), while communication from the tax office can vary in quality.
For people who are trying to cope with the recent death of a relative, such poor communication merely adds insult to injury, and can be particularly distressing for those who are new to the process.
To combat this, the OTS has suggested that HMRC issue payment receipts automatically in order to reduce uncertainty and reassure executors that the payment has gone through.
In April, HMRC introduced a 12-week window, during which it has to respond to enquiries from executors, which is certainly a welcome improvement on previous practice.
But it is still early days for this system, and the OTS might refine it if necessary. The bottom line is that good communication from HMRC is necessary in order to calm concerns from executors.
The probate debate
Before you are granted a probate (which gives you legal control over someone’s property, possessions, and money), you have to submit the correct forms to the tax office and have paid the IHT.
But problems can arise when executors of an estate find it difficult to pay the tax before they have access to the deceased person’s assets.
The OTS has an opportunity to find a smoother route for the public, removing unnecessary u-turns, stop signs and speed bumps
The OTS recommends that HMRC work with the court system to come up with options for streamlining the payment and probate process.
It also suggests that consideration should be given to extending the payment deadline.
Ben Taylor from Roythornes Solicitors says that this is not surprising, particularly given the current time limit of six months has been criticised by the public and professionals alike.
Although less than five per cent of people pay the death tax (or 25,000 estates), executors have to fill in IHT forms for half of all deaths. Given the huge proportion of the population who are forced to endure the burdensome IHT process, it’s certainly high-time the government cleaned up the rules and digitalised the system.
“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 that their parents ever owned,” says Griffin.
“But the OTS has an opportunity to find a smoother route for the public, removing unnecessary u-turns, stop signs and speed bumps.”
However, don’t expect anything to be implemented any time soon, particularly bearing in mind that the second report is set to be published in the spring.
According to Coles, such delays will come as no comfort to anyone currently mired in the process. “You’re likely to hit your deadline for submitting your forms well before we see any material change.”
However, the good news is that, with such an extensive list of recommendations (and more to come), eventually we should see a considerable shake-up of our archaic inheritance tax system.