Inheritance Tax delays can cost beneficiaries dear, writes John McArthur

John McArthur, Head of Tax, Gillespie Macandrew
John McArthur, Head of Tax, Gillespie Macandrew
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The problem with our existing tax system is that it’s now overly complicated and when even HMRC’s own system can’t work out the correct income tax liability that a taxpayer has to pay, that must raise serious questions about the ongoing viability of our tax collection system.

Our tax system reflects the society in which we live. We live in a complicated society and, let’s face it, none of us like paying tax, but it’s one of the civic responsibilities of living in a civilised society. The corresponding responsibility of the government and those who spend our taxes is to spend them wisely and with as little waste as possible.

One universally disliked tax is Inheritance Tax (IHT). During the financial year ending April 2018, the amount of IHT collected – £5.2 billion – was the highest ever and has doubled since the depths of the recession in 2009/10. Yet only 4 per cent of estates pay IHT.

In 2016/2017, just over £22.4 billion was inherited via estates whose total amount was less than Inheritance Tax Nil Rate Band (£325,000), or £650,000 for married couples. These are massive amounts when compared to the relatively modest £400m-£600m which it cost the UK Exchequer by not charging IHT on agricultural and business assets.

The amount of relief given for gifts to charities exceeded both the cost of agricultural and business property relief by almost £150 million each. Add all these together, the main reliefs against IHT cost the Exchequer just over £5.6 billion which is only a quarter of the tax not received from those estates which were below the IHT threshold.

Unless the government find a simpler, easier and more streamlined system for collecting Inheritance Tax, the system cannot cope with any increase in the number of estates subject to Inheritance Tax.

The stresses in the system don’t stop with HMRC but also extend to the Scottish Court Service, where one sheriff court has been known to take over ten weeks to issue Confirmation. This, combined with delays with HMRC, means that it’s taking longer and longer for estates to be administered and the stock market has become more and more volatile.

This leaves estates in danger of perhaps losing significant amounts of money if the stock market happens to fall while the executors are waiting for confirmation. The UK government has recently referred IHT to the Office of Tax Simplification and asked it to produce a review which is hoped will be issued in the autumn of this year. To the Chancellor’s credit, he asked them to review both how IHT works and also the actual tax itself. The OTS can’t look at the actual process of obtaining confirmation in Scotland, that’s for the Scottish Government to look at but, given their track record, this won’t happen quickly.

Succession, particularly intestate succession where there’s no will, is an emotive subject and there are no easy answers but the Scottish Government has sat on a revised Succession Act produced by the Scottish Law Commission since July 2009 with little sign of any progress in its implementation. Similarly, the Scottish Government has sat on a report on trusts and a new Trust Act since 2014. Trust law in Scotland is in an even more deplorable state than succession since its principal Act dates from 1921 and is now well passed its use-by date.

The interaction of trusts, tax and succession is extremely complicated but, nevertheless, it’s incumbent on our governments to make sure our laws are fit for purpose and in Scotland succession and trust law fall far short of being “fit for purpose”.

John McArthur, head of tax, Gillespie Macandrew