Tax simplification

Back to results

Is Inheritance Tax (IHT) still fit for purpose?

According to the latest HMRC estimates(Opens new window) the total IHT raised in tax year 2017/18 was £5.2 billion, up 8% from 2016/17. The Chancellor, Philip Hammond, wrote to the Office of Tax Simplification (OTS) on 19 January 2018 asking it to undertake a wholesale review of IHT with the aim of finding opportunities to simplify it. In February, the OTS published a scoping document(Opens new window) in relation to the review and in April, a call for evidence(Opens new window) on IHT. 

The OTS has set out that they’ll be looking at administrative and technical areas such as:

  • the process around submitting IHT returns and paying the tax;
  • the various gifting rules, including IHT exemptions such as normal expenditure out of income exemption and the annual exemption, and their interaction with each other;
  • other administrative and practical issues around routine estate planning and compliance;
  • complexities arising from reliefs and their interaction with the wider tax framework (eg business property relief and agricultural property relief);
  • the scale and impact of any distortions to taxpayers’ decisions, investments and timing of transactions, and
  • the perception of the complexity of the IHT rules amongst taxpayers, practitioners and industry bodies.

The OTS is planning to publish their findings and recommendations in the autumn 2018. We could then see some announcements in the 2018 Budget detailing proposed changes to the IHT regime, together with the publication of accompanying consultation documents.

Complexities in the tax treatment of savings

The Office of Tax Simplification (OTS) also recently carried out a review of the tax treatment of savings income with the aim of identifying areas that could be simplified. The review focussed on the following subjects:

  • the taxation of interest and the personal savings allowance and zero percent savings rate;
  • the tax treatment of dividend income and the dividend allowance;
  • the various types of ISAs that are available;
  • the tax treatment of pension income;
  • withdrawals from investment bonds, and
  • the tax treatment of investments in collectives.

The OTS published a detailed report on its findings(Opens new window) in May 2018 and its main observations are:

  • 95% of people don’t pay tax on their savings income. However, the interaction of the various rates and allowances are complex with HMRC’s software sometimes generating errors.
  • People are more aware of the benefits of ISAs than they are about the dividend allowance, the personal savings allowance and the zero percent savings rate. This means that they might not always choose the best savings option for them.
  • People often don’t understand that their lump sum pension fund withdrawals could be taxed at the emergency rate. 

These are obviously areas where you could really add value in providing guidance and advice to your clients.