Perhaps because I have advised on Inheritance Tax for so long, I have become accustomed to its "idiosyncrasies", the twists and turns of the legislation, its unsuspected traps and its unexpected bonuses. It doesn't surprise me any more when large and unexpected liabilities arise or shock me when other significant estates pay nothing at all – although to be fair usually after a lifetime of careful planning and attention to detail. It has just become part of the nature of the tax.
So, it was fascinating to read the first stage of HM Treasury's Office of Tax Simplification (OTS)'s promised review of the inheritance tax system. The review focuses on administrative issues rather than the tax itself; even so it attracted over 3,500 comments, far more than any of the OTS' previous reviews.
The review provides some well-needed insight into exactly why IHT is one of Britain's most hated taxes. Whilst, the OTS knew IHT was 'almost uniquely unpopular', the scale of that unpopularity surprised even them.
"IHT returns are submitted in relation to about half of all UK deaths, but the tax is payable in respect of less than 5 per cent of deaths"
Fewer than 25,000 estates in the UK are liable for Inheritance Tax. That is less than 5% of all deaths. However, that number has increased every year since the 2009/2010, partly because of the freeze on the amount that can be left IHT free (the nil rate band) and partly due to increasing residential property values, particularly in London and the South East.
Whilst Inheritance Tax makes up less than 1% of the total tax raised by the Exchequer, higher value estates pay a lower effective rate of tax. This is because a greater proportion of their assets are likely to be covered by a relief. The report shows that over 70% of the value of an estate worth more than £10 million is relieved in this way.
When you think about it, lower value estates mostly consist of cash and residential property which do not commonly attract relief. They are also relied upon to live and fund peoples' everyday lives, so cannot be given away.
As estates increase in value, they have proportionately less cash and residential property. Instead, they have more investments and 'other assets', which commonly attract relief. For example, certain business assets, including some unlisted shares and shares traded on the Alternative Investment Market (AIM), qualify for business property relief (BPR) at 100% of the value of the asset and farms may qualify for agricultural property relief (APR).
There are a number of interesting findings in the OTS review. Firstly, IHT returns are submitted in relation to about half of all UK deaths, but the tax is payable in respect of less than 5 per cent of deaths, which means that most people who have to struggle with the IHT system do not actually need to pay the tax at all. Next, the tax has to be paid before the assets in the deceased estate can be transferred by a grant of probate which can create significant practical problems in accessing the cash to pay the tax bill – a particularly nasty vicious circle in practice, where not all banks and financial institutions are geared to help.
In short, Mrs Ross's advisers considered that this added up to a business that was not mainly one of making or holding investments and therefore met the requirements to qualify as relevant business property for BPR purposes. HMRC disagreed.
The main problem is that new complexities are layered on the old far more quickly than old problems are resolved. The residence nil-rate band and the reduced rate of IHT where a proportion of an estate is left to charity are examples of legislation that is far too complex, poorly drafted and poorly understood. Relief on furnished holiday lettings, joint ventures and limited liability partnerships, and the interaction between agricultural and business property relief are also confusing. The reality then is that taxpayers, at their most vulnerable following a bereavement, may pay more inheritance tax than they need or suffer professional costs, lost time and stress to demonstrate that there is no tax to pay.
The next instalment of the OTS review on IHT is out in Spring 2019 covering key technical and design issues. In the meantime, it remains wise to follow three rules: take advice early, plan over the long-term and make sure that relevant legal documents, such as wills and trusts, are drafted by appropriately qualified specialists. IHT remains a tax that can be mitigated with careful planning over sufficient time but has a very nasty sting in the tail for those that leave it too late.
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