Death tax madness!
Grieving for his father was bad enough – but then Marc Shoffman had to battle reams of baffling inheritance tax forms ... for NOTHING
INHERITANCE tax may end up being charged on fewer than five per cent of estates – but negotiating the maze of forms required to be filled in before discovering that no tax is due would test the patience of a saint.
I know because I have just gone through the painful experience after my father Elan died in October. Dad was only 68, but he had been battling with Parkinson’s for 13 years and finally succumbed to a heart attack brought about by high blood pressure. As the eldest sibling – and Dad being divorced – it was left to me to sort out his finances.
As I soon discovered, Her Majesty’s Revenue & Customs may be making it easier for taxpayers and businesses to pay online. But Hector, the tax inspector’s customer friendly face, does not extend this to inheritance tax. The system is complex, baffling and, in the midst of grief, utterly soul-sapping.
START BY WADING THROUGH PAPERS
FAMILIES have six months from the end of a loved one’s life to pay inheritance tax. To do this, they must first value the deceased’s estate. Six months might seem a generous time gap between death and the payment of tax, but it soon evaporates when you have a funeral to arrange and grief to process.
Then, there’s the arduous process of locating bank accounts and closing them as well as finding details of any pensions and investments including Isas and shareholdings.
But the sooner you report an estate’s value to Revenue & Customs, the quicker you can get control of assets such as a property or bank accounts through a process known as probate.
An estate is made up of everything someone owned including savings, shares, possessions, bank accounts and property, minus debts.
Inheritance tax is typically paid on anything above the current £325,000 threshold, known as the nil-rate band. The tax is charged at 40 per cent, but reduces to 36 per cent if more than 10 per cent of the estate is left to charity.
There are exemptions, such as if there is a spouse to pass everything on to or if the assets above the threshold are all left to charity.
The latest inheritance figures for the year beginning April 5, 2016, show that two-fifths of estates valued above the nil-rate band weren’t liable for tax as the assets were passed to a surviving partner or had already been inherited from a deceased spouse.
There is also a more recent relief called the residence nil-rate band. It was introduced by then Chancellor George Osborne in
April 2017 to make it easier to pass a family home to direct descendants without a tax charge. The residence nil-rate band (a tax break Jeremy Corbyn now wants to axe) takes a portion of the value of a person’s main residence out of their estate for inheritance tax purposes. It is currently worth £150,000 and is due to rise to £175,000 from April 5 next year (provided the Conservatives remain in power).
This allowance is added to the nilrate band and was meant to cut – and even wipe out – tax bills for many families, but my efforts to disclose my father’s estate show Revenue & Customs’ systems are creaking at the seams.
GET PASSED PILLAR TO POST BY HELPLINE
DAD died on October 18 and left what on paper is a relatively simple estate. A couple of bank accounts, a small shared buy-to-let portfolio and a residential property plus a few debts such as unpaid care fees.
It is with this in mind – after getting my dad’s property valued and obtaining final statements for his current accounts – that I set out to tell Revenue & Customs the estate’s value myself, rather than paying for lawyers to do it for me.
Because my parents were divorced I knew I wouldn’t be able to use the spouse exemption, but the residence nil-rate band and an outstanding debt brought him below the £325,000 threshold.
In theory, I should have been able to give Revenue & Customs all of this information online. After all, it has set up an online tool for ‘excepted estates’ where there is no tax to pay – you just provide details of assets plus any debts. You can apply the spouse or charity exemption online, but there is no way of doing this for the residence nil-rate band (not that Revenue & Customs’ helpdesk is aware of).
It does have a dedicated inheritance tax helpline, but I’m not sure how helpful it is. One customer representative told me there was a way to apply the property exemption online before providing a number for internet support. This department advised me to go back to the helpline where another person told me I couldn’t apply the residence nil-rate band online. I needed to complete a paper form.
This is when it all got incredibly tricky. Revenue & Customs has two paper forms. There is a catchily named eight-page IHT205 document designed to prove that an estate isn’t liable for tax. But again, this doesn’t let you use the property exemption.
This left me with the more complex IHT400 form, used to report the value of an estate and work out how much tax is owed. I had to complete 121 sections over 16 pages, despite knowing there would be no inheritance tax to pay at the end.
You need to provide personal details of the deceased and the value of any assets as well as debts owed or gifts made. But there are also potentially 23 accompanying forms or schedules that may have to be completed to provide further information about an individual’s assets or debts.
It is only through one of these accompanying forms – a four-page document called IHT435 – that the residence nil-rate band relief can be applied. The IHT400 form automatically calculates how much tax there is to pay once you enter the appropriate values. And I was relieved, although not surprised, to find my dad’s estate below the threshold and displaying a minus figure. Despite this, I still had to print and send the documents to Revenue & Customs.
HASSLE OF WASTING OF TIME AND PAPER
THE form I completed for my dad is just one of 275,500 that Revenue & Customs receives each year. If an IHT400 document and all the accompanying forms were required, which may be the case for more complicated estates, you could end up having to print and post 102 pages. If each of those 275,500 reports came to 102 pages, that amount of A4 paper lined up sideby-side would spread across 452 football pitches, which doesn’t say much for Revenue & Customs’ environmental credentials. It also seems like a waste of time for people like me with no tax to pay – as well as Revenue & Customs staff.
AND EVEN LAWYERS SAY ADMIN IS CRAZY
LAURA Kearns, a private client solicitor at Royds Withy King, says: ‘Many people, especially those dealing with low-value estates, don’t want to employ a solicitor and incur costs for what seems like a simple task. But inheritance tax isn’t straightforward from an administrative point of view.’
The Office of Tax Simplification has called for the system to be simplified and digitised. The sooner the better. Rest in peace, Dad.