Inheritance tax receipts are on course to hit another record high in the 2018-19 tax year, but there’s an estimated £600 million gap between tax owed and tax paid.
The tax gap for inheritance tax (IHT) stands at £600 million a year, the Office of Tax Simplification (OTS) has found.
In percentage terms, the shortfall equates to 10%. The IHT tax gap, according to the OTS, is “relatively high as a percentage of the total IHT due, compared to other taxes”.
In order to simplify the IHT system, the OTS has proposed bringing IHT into the digital age. Last week, in the first part of a two-part report (the second of which will be released in the spring of 2019), the OTS urged the government to implement a fully integrated digital system for IHT, including the ability to complete and submit a probate application.
Lynne Rowland, tax partner at Kingston Smith, says that while the OTS’s proposals will reduce and simplify the administration of estates, one of the other main drivers behind reforming IHT is to reduce the tax gap.
She adds: “This is a shortfall of over 10% in the total tax take from IHT and is clearly a principal driver in the government’s eagerness to reform the tax.
“But there are other anomalies and unnecessary red tape that need removing from a process that takes place at a very emotional time for families. Although inheritance tax returns are required for around 50% of deaths, IHT is payable on fewer than 5% of estates, yet these calculations must be undertaken and any tax paid within six months.”
Rowland adds the whole IHT methodology needs to be simplified, alongside a rewrite of the IHT legislation to make it more understandable. “Enabling online submission and amendment of forms is not enough,” she says.
The review of IHT, ordered by chancellor Philip Hammond earlier this year, comes at a time when IHT receipts are at record levels. One of the main drivers behind this has been a static IHT threshold since 2009 at £325,000.
Sean McCann, a chartered financial planner at NFU Mutual, is one of a number of experts who argue that the IHT system looks “outdated” and should be changed.
But rather than increasing the threshold, McCann advocates replacing all the existing IHT exemptions with one single annual exemption of at least £10,000, which would increase in line with inflation.
He adds: “Personal finances have moved on a great deal in the last 32 years, and it’s about time the limits and exemptions matched the needs of 21st-century families.”
Other experts, though, do not expect radical changes being made to the IHT system. However, a helpful move would be to simplify rules around gifting, says Sagar Morjaria, a wealth adviser at Canaccord Genuity Wealth Management.
He adds: “The rules around gifting are excessively complex, to such an extent that individuals do not take advantage of them and indeed are not aware of some of the exemptions that exist.”