Britain is failing to tackle an epidemic of tax fraud, so said the National Audit office last month. In some cases, there is no stopping fraud being committed, but a simpler tax system with fewer arcane rules would surely provide the best incentive for individuals to comply.
For inheritance tax, for example, only a small number of people pay it, but a far greater number of people worry about it. Many only seek advice when a loved one has died but many more require particular assistance with lifetime gifting which is not reported on death.
Rishi Sunak and his chancellor Jeremy Hunt are keen to maintain the current rules. In the Autumn Statement, the nil-rate band will remain at its current level of £325,000 until at least April 2028. This stagnation is not just a question of economics, but a lack of innovative thinking to simplify a system causing distress at a time which, by its nature, is fraught with emotions.
Research from the Office of Tax Simplification (OTS) shows that a third of bereaved families spend over 50 hours navigating complicated inheritance tax rules and systems. Penalties for reporting incorrectly can total up to 100 per cent of any tax due and executors bear the burden of payment. Simplification of gift taxes would allow individuals to benefit from the allowances, and it would also ensure that executors are not caught by penalties and tax payments on gifts that were made many years before they had any involvement in an estate.
In particular, the taxation of lifetime gifts is widely misunderstood, administratively burdensome and will often only be considered on death meaning that proper records have not always been kept. Thirteen per cent of the UK population are “gifters”, meaning they regularly gift amounts of over £1,000 in a tax year.
Often people have heard of some of the rules, but without an overview of all them opportunities can easily be missed, and executors are at risk of non-compliance. Individuals have an annual exemption of £3,000, a small gift allowance of £250, allowances for cash gifts for weddings and if that isn’t enough to give you a headache, these allowances sit on the backdrop of the seven year rule which states that any large gifts, over an individuals’ nil rate band, can potentially become chargeable to inheritance tax. The rules are piecemeal and without advice it is difficult to manoeuvre them.
A recent survey by the OTS showed that most respondents regarded these gift rules as either “complex” or “very complex”. Why not increase the annual allowance and give a conclusive figure allowed for gifts every year, thereby streamlining the process?
Not only would this provide an equalised allowance for all, but it would also demystify rules and give individuals a chance of correctly applying them. The OTS has already suggested a similar approach but so far, this has been ignored.
Ultimately, the UK tax system remains rooted in 19th century principles. It requires modernisation as well as simplification. But it’s not a priority for government,
HMRC’s latest “tax gap” data, which estimates the difference between tax collected and how much tax should have been collected, showed the gap standing at over £32bn. If this tax gap spirals any further out of control, perhaps political pressure will ensure that tax reform does reach the top of the agenda.