Inheritance TaxNov 28 2018

IHT tax gap reaches £600m a year

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IHT tax gap reaches £600m a year

In its first report on the inheritance tax system out last week (November 23) the OTR pointed to the 'relatively high' tax gap compared with other taxes, which it had collated from HMRC's latest tax gap estimates for 2016/17. 

The IHT review was commissioned by Chancellor Phillip Hammond earlier this year after he said in January he was concerned the system was "particularly complex".

The tax gap represents the difference between the amount of tax HMRC expects to be paid, in theory, and what is actually paid as a result of non-compliance, simple errors, avoidance or criminal attacks on the tax system.

The gap had formed despite IHT receipts totalling £5.2bn in 2017/18 and continuing to grow for the eighth year in a row notwithstanding the recent introduction of a nil-rate band for family homes.

Lynne Rowland, tax partner at Kingston Smith, said the IHT tax gap was a shortfall of more than 10 per cent of its total tax take and suggested this to be a "principal driver" in the government’s eagerness to reform the tax system.

She said: "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 about 50 per cent of deaths IHT is only payable on fewer than 5 per cent of estates, yet these calculations must be undertaken and any tax paid within 6 months."

In its review, the OTS stated the £5.2bn figure would cover about one week’s cost of providing UK pensions and welfare benefits in the same year.

The OTS review confirmed fewer than 25,000 UK estates are liable for IHT each year, compared to an average 570,000 deaths.

The report found IHT forms were completed for 275,000 estates in the 2015 to 2016 tax year, more than ten times the number of estates on which the tax was paid.

Ms Rowland said: "The relatively recently introduced IHT relief for the family home has restricted benefit, discriminates against those without children - and is simply not fit for purpose.

"Enabling online submission and amendment of forms is not enough, the whole methodology needs to be simplified alongside a rewrite of the IHT legislation to make it more understandable."

In its first instalment, the OTS review recommended the government should move to a fully digital system for inheritance tax and review its IHT guidance to make it clearer and more concise.

The second part of the review will address the overall design of the system and is to be released in the spring next year, the OTS said.

Rachael Griffin, tax and financial planning expert at Quilter, said there has been a lot of press surrounding IHT and therefore there was perhaps an expectation to see more receipts. 

She said: "It is a fact that there are some people who are not paying IHT when they should be, it can be confusing as and when the tax is due. 

"A lot of the time people do not keep records of gifts made to individuals or in the event of something other than death, and this can lead to uncertainty surrounding payment of IHT.

"In the instance of a death, invariably a solicitor will have been engaged who pulls together all the requirements of IHT but this is not always so in the case of gifts.

Ms Griffin added: "The government has made it clear they wish to make IHT more simple and transparent, but this is true of all taxes. 

"Simplification does not always mean adding to the process and whilst there is pressure on the Exchequer not to lose money, simplifying might mean making less people subject to the tax."

rachel.addison@ft.com