It is perhaps an old adage of film reviews that a sequel is never as good as the first movie. It is also a complaint from cinema-goers that an ending was so obviously setting up to create a 'franchise'. The latter point could apply to the Office of Tax Simplification's "Inheritance Tax Review - first report". The former perhaps not so as the OTS is quite open that the main event is to follow. The first report focusses on administrative matters while giving a flavour of the topics and issues it will return to in more detail in the second report. So, perhaps put the popcorn away and save it for the second report. But this blog looks ahead to the second report.


The OTS' report opens with a lot of statistics. 5% of estates pay IHT... 25,000 estates each year are taxable... annually, 275,000 IHT returns for estates are submitted... £5.2bn p.a. is taken in IHT... and that figure is growing quite sharply (it was £2.38bn in 09/10).

This summer, Head of Personal & Family at Brodies, Mark Stewart blogged on some of the stark IHT statistics.

"You want toget on that t'internet, that's what you want to do!" (Peter Kay)

If garlic bread is not the inheritance tax ("IHT") future then digital is what the OTS thinks it must be. Until then, better forms and better communication with executors is the OTS' call.

Here are the key OTS recommendations in order to improve IHT administration:-

  • there should be a fully integrated digital system for IHT, including the probate/confirmation application.
  • until a fully digital system is in place, updates should be made to the IHT forms to reduce and simplify the administration of estates. There should also be a review of forms for trusts.
  • HMRC should review is inheritance tax guidance "targeted at those who worry unnecessarily" and with worked examples and a "road map" as well as education tools such as webinars.
  • there should be better and more speedy communication with executors. This would include new automated payment receipts.
  • HMRC and others should consider streamlining and coordinatingIHT payments and probate/confirmation process.
  • review the requirement, in some circumstances, for trustees having to submit forms where no inheritance tax is due and no reliefs or exemptions are being claimed.

The bigger picture: a glance towards the second report.

Peppered throughout the OTS report are commitments to look at some issues in more detail as well as some hints as to topics to be considered. Some of these issues arise out research and consultation already undertaken by the OTS.

The areas of interest highlighted in the first report include:-

The residence nil rate band.In particular its apparent undue complexity and its limit to 'lineal descendants' meaning there will be numbers of families unable to take advantage of it or chosen beneficiariesdo not fall into the category of 'lineal descendants'.

Lifetime gifts. This has attracted media attention in recent time. The OTS has identified issues such as complex exemptions, the level of exemptions have not kept pace with inflation and record-keeping can be difficult. The first report also flags up issues with liability for the payment of tax on 'failed' gifts and similar matters which might have unintended consequences for the deceased's chosen beneficiaries. The first report briefly touches on the perceived ability of 'wealthier' individuals to pass on wealth during life and that the figures for (taxable) estates do not take account of gifts made earlier than seven years before death.

Businesses and farms. These can attract valuable IHT reliefs. The OTS makes interesting statements here. It states that it has received comments "which raised some quite broad questions". It also said that "evidence gathered so far suggests the reliefs are broadly working in a straightforward way." The report notes that "the OTS' focus will be on the practical application and complexity of these reliefs rather than major changes to the reliefs themselves." The OTS says that it recognises that certain types of business asset are treated more favourably than other assets. On these matters the report appears to conclude that it is for government, should it so choose, to make changes to these reliefs, but that topics such as how Business Property Relief and Agricultural Property Relief fit into the wider tax framework will feature in the second report.

Trusts. Trusts feature fairly lightly in the first report. The OTS suggests that the perception that 'wealthy' individuals put assets in trust to avoid IHT is inaccurate and does not take account of trust taxation changes in 2006. The utility of trusts as a protective and prudent legal environment and not about tax featured in the introduction to the Government's current review of the taxation of trusts (on which we have blogged). The second report willconsiderapparent complexities attached to insurance and other products held in trust.

Will writing. The report says that the OTS has observed that "regulating the will writing market would help improve the administration process". This perhaps should also extend into the process of obtaining probate/confirmation and the stages after that milestone.

It's not all about IHT. Updated and coordinated processes for income tax and capital gains tax in estates should not be overlooked.

Charities. There will be a chance to review the 36% reduced rate of IHT where 10% of an estate passes to charity and the extent to which the rules are toocomplex.

Concluding thoughts: making the system work and will there will be change on the horizon?

The first report is about administrative matters. The second report could go deeper. But it seems that the OTS wants to create an IHT system that works as smoothly, consistently and transparently as possible. It does not appear that the OTS is seeking to embark on a wholesale reform of the very basis of the tax... and, importantly, the reliefs. The Chancellor's 'scope of review' given to the OTS does not lend itself to a blank canvas.

We will need to see what the next report brings. The timing of the report might also be important as to what happens after its publication. What we do know is the set of IHT rules and reliefs in place at the moment. For those considering estate planning steps, there is some current certainty around the rules to form the basis for decisions on succession planning.