The shortfall between the inheritance tax owed to the Treasury and the amount collected has risen.
New statistics published by HMRC today show that the inheritance tax (IHT) gap has grown to £600 million in 2016/17, rising 50 per cent from £400 million five years ago in 2012/13. This gap is likely to be a reflection of the growth in the amount of IHT owed.
The tax gap (for IHT but also other taxes) measures the difference between the amount of tax the Treasury thinks it should be getting and what was actually paid.
HMRC states: ‘The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap. It is impossible to collect every penny of tax that is owed.’
The amount pocketed by the government in IHT reached a record high at £4.84 billion in 2016/17, increasing 4 per cent compared to the 2015/16 tax year (£4.7 billion). The gap between tax owed and that received has grown from £575 million in 2015/16 to £600 million in 2016/17, a 4.3 per cent increase - roughly in line with the increase in tax taken.
Steve Webb, director of policy at Royal London, says: ‘Inheritance tax is one of the most complex taxes in the system and there is considerable scope for individuals to organise their affairs in a way which reduces the amount of tax which they pay.
‘As IHT revenues have grown, mainly because of the increase in house prices, so the absolute amount of the IHT “tax gap” has also grown. It is very welcome that the Office for Tax Simplification is looking into ways of simplifying IHT, as this should make life easier for taxpayers and also make sure that a higher proportion of the tax due is actually collected.’
James Badcock, partner at law firm Collyer Bristow, echoes Webb’s sentiment that more fundamental change would be welcome. He says: ‘In its current form, IHT’s complexity encourages behaviours which are detrimental to sensible financial planning and the distribution of wealth through generations.’
He argues that the rules are sometimes so irrational that there is an element of ‘accidental evasion’ by those who don’t have professional advice. ‘The new main residence nil rate band was intended to take normal people out of inheritance tax but it is so complex that people are missing out in its benefits,’ Badock adds.
‘If HMRC wants to close the tax gap, it is crucial that IHT rules are simplified so that fewer errors are made and IHT is collected correctly.’ He concludes: ‘At the moment we have asset-rich baby-boomers, asset-poor millennials and a ticking tax bomb.’