Reform IHT chaos Please
Experts’ demand as research reveals that THOUSANDS have to fill in forms for nothing
THOUSANDS of grieving families are being forced to complete complicated paperwork to report the value of a loved one’s estate to the taxman when they die – even when there is no inheritance tax (IHT) to pay.
Experts say the reporting requirements for possible inheritance tax bills are cumbersome, not fit for purpose, and ripe for reform in March’s Budget.
Revenue & Customs provides an online form for loved ones – known as executors – to report estates below the £325,000 tax threshold, called the nil-rate band. But there is a longer and more complicated paper-based ‘IHT 400’ document for estates facing a potential 40 per cent inheritance tax charge.
A Freedom of Information (FOI) request by wealth manager Quilter reveals a high proportion of executors still complete the tricky 121 sections of IHT 400 paperwork and accompanying documents – even if by using exemptions they can bring an estate below the threshold and therefore pay no tax.
Of the 49,500 IHT 400 forms completed in the tax year ended April 5, 2017, 43 per cent resulted in no tax charge, the FOI data shows. Later data is not available.
Families or those appointed to look after an estate are missing out on the easier alternative of reporting the value online or using the more simple IHT 205 form. This is reserved for ‘excepted estates’ where the assets and possessions left by a deceased person are below the £325,000 threshold, and passed to a spouse or left to charity.
There are other exemptions that can reduce the value of an estate. Husbands and wives can leave assets to each other tax-free on death but once both pass away any unused allowances below a married couple’s combined nil rate band, currently £650,000, can be passed on without any IHT.
There is also the residence nil rate band, introduced in April 2017, which 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 6 this year.
But these exemptions don’t meet the taxman’s strict definition of ‘excepted estates’ and cannot be claimed for online. As a result, mourning relatives must complete the longer form or pay for legal help.
Rachael Griffin, tax and financial planning expert at Quilter, warns this is creating an unnecessary administrative burden for many taxpayers. She says the inheritance tax reporting system is ripe for reform.
Griffin says: ‘Some people are completing the IHT 400 form out of confusion as the definition of excepted estates isn’t well known and it can be hard to understand and navigate the exemptions.’
In November 2018, the Office of Tax Simplification called for Revenue & Customs to digitise inheritance tax reporting and provide more guidance. But little action has been taken since.
Griffin adds: ‘Having online access would be better than manually filling in a form. For most situations, you know no inheritance tax is due but you still have to fill in these forms. It also creates an administrative burden for Revenue & Customs.’
She is not hopeful of inheritance tax reform in the March Budget. Griffin says: ‘The Office of Tax Simplification report is probably gathering dust on someone’s shelf inside a Revenue & Customs office – pending Brexit.
‘When we get the Budget, I don’t believe an overhaul of inheritance tax will be the first thing on the list. But it would be a real shame if that gauntlet wasn’t picked up.’
Sam Packer, of the TaxPayers’ Alliance, says: ‘The administrative burden for those who do not even end up paying inheritance tax is one of the many mockable manners in which inheritance tax does damage.
‘As well as unjustly double-taxing people, inheritance tax is fiendishly complex, with a guide on it running to over 1,100 pages. The Government should scrap it altogether.’
But Revenue & Customs is unrepentant. On Friday, it told The Mail on Sunday: ‘The vast majority of estates applying for probate do not have to complete a full inheritance tax account. Some non-taxpaying estates must provide a full account, as they do not meet the definition of an excepted estate.’