Why is inheritance tax - the 'most hated tax' - so complex?

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The Office of Tax Simplification (OTS) has published the first part of its inheritance tax (IHT) simplification review.

Not only is it dubbed the ‘most hated tax’, but inheritance tax (IHT) is notoriously complex. The process is old fashioned and in real need of a refresh, to ensure beneficiaries don’t suffer unnecessarily at the hands of the current system – and get access to what’s theirs in a timely manner.

The OTS’s report highlights a variety of issues with the current UK inheritance tax system:

  • IHT returns are submitted for about half of all estates, even though tax is paid by less than 5%;
  • Most of the paperwork cannot be completed and submitted online and is far from user-friendly;
  • Probate is not normally granted until IHT has been paid, which can create difficulty for executors;
  • The residence nil-rate band, introduced in 2017/18, was widely criticised as being ‘very complex,’ and disadvantaging those who don’t have children and those who haven’t owned their own home.

The OTS made a key administrative recommendation: ‘The government should implement a fully integrated digital system for inheritance tax, ideally including the ability to complete and submit a probate application.’ HMRC have already started such a project in 2014, and in April 2018 announced it would be delayed, choosing instead to focus on the short IHT205 form which applies to certain estates where no IHT is payable.

The OTS review timetable

The Chancellor asked the OTS to undertake its review of IHT in January 2018. The instruction was, ‘to identify opportunities and develop recommendations for simplifying IHT from both a tax-technical and an administrative standpoint.’

The OTS originally indicated it would publish a report ahead of the Autumn Budget, but Mr. Hammond brought the Autumn Budget forward to October and nothing emerged from the OTS in time. Such was the response to the first half of the report (published November 2018), which covered ‘administrative issues, the organisation has decided to produce two reports. The second report, covering ‘key technical and design issues,’ is due in spring 2019, and could herald changes to tax rules.

The result may be less generous than the current system, meaning it could be wise to review your inheritance tax planning opportunities now. A qualified financial adviser can simplify the complexity around inheritance tax and help create an IHT plan suited to you.

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