A more trusted, simple and modern tax system?

25 March 2021

Tuesday 23 March was “Tax Day”, the day on which the Government published “a series of tax documents and consultations in a move to strengthen policymaking and help create a more trusted, simple and modern tax system”.

The initiative to publish these documents at a remove from the Budget “allowing more space for scrutiny from stakeholders” is welcome. But what of the rumoured reforms to inheritance tax, capital gains tax and the taxation of trusts? Little news at this stage, as it turns out.

Inheritance tax

The Office of Tax Simplification (OTS) has published two reports into possible reforms of inheritance tax, one in 2018 about the administration of inheritance tax and another in 2019 about simplifying the design of inheritance tax. 

The Government responded to the first of these reports with some pragmatic changes designed to reduce the number of estates that will need to file inheritance tax returns and the number of forms executors need to complete. In addition, the temporary changes made in response to the pandemic whereby inheritance tax returns no longer require the physical signature of executors will be made permanent. Further administrative changes are expected.

The second OTS report suggested various ways to simplify inheritance tax more generally (though stopped short of the sort of wholesale reform suggested by the APPG in January 2020). Suggestions included:

  • replacing the annual gift exemption and the marriage gift exemption with a more general overall personal gift allowance;
  • reforming the exemption for normal expenditure out of income, possibly by replacing it with a higher personal gift allowance;
  • reducing the tail on potentially exempt transfers from seven years to five years and abolishing taper relief;
  • removing the capital gains tax uplift where a relief or exemption from inheritance tax applies;
  • reforming business property relief;
  • exempting death benefit payments under term life insurance policies regardless of whether they are written into trust; and
  • abolishing the pre-owned asset tax rules.

A response to the second OTS report is expected “in due course”.  It remains to be seen whether the Government will be as enthusiastic about enacting these recommendations as it has been with the first OTS report.

The taxation of trusts

Also published today was the summary of responses the Government received about the taxation of trusts. These included calls from various professional bodies for simplification of the existing tax regimes (for example, the ICAEW urged the Government to conduct “a full review [that] does not simply look at a few tweaks to the legislation”). Although the summary makes for interesting reading, it gives little away about possible future reforms. The paper concludes simply by noting that:

The responses did not indicate a desire for comprehensive reform of trusts at this stage. The government will keep the issues raised under review to ensure that its long-term approach to the taxation of trusts meets its objective. In the shorter term, the government will continue to review specific areas of trust taxation on a case-by-case basis...

In other words, the Government has decided not to take the opportunity for a holistic reform of the taxation of trusts - including some aspects which are perhaps among the most complicated personal taxation provisions.

Capital gains tax

Conspicuous by their absence were any significant changes to capital gains tax or a response to the OTS’s recent review of capital gains tax. Less surprising was the absence of any mention of a wealth tax or the Treasury Committee’s recent paper Tax after coronavirus

Any changes, if they are to come, are more likely to be announced together with other revenue raising policies in the Autumn.

Helping taxpayers get offshore tax right

One of the consultations launched is aimed at helping taxpayers avoid making errors in relation to “offshore tax” (which HMRC define as “UK tax that is due on non-UK income, gains...or transfers”). 

The Government’s suggestions include:

  • using data gathered under, for example, the CRS regime to help HMRC proactively prompt taxpayers into declaring offshore tax liabilities;
  • working with tax advisers, for example by sharing the data available to HMRC about an individual’s offshore affairs before the relevant filing deadline; and
  • increasing public awareness about offshore tax obligations (including “offshore-specific educational content for social media channels”).

Although the consultation does recognise that the complexity of some taxpayers’ affairs can cause errors to be made, it does not mention the possibility of simplifying offshore tax as a way of helping taxpayers get offshore tax right.

Timely payment

Another consultation launched focuses on the possibility that the payment of income tax (and some corporation tax) liabilities could be brought closer to real time (in a similar way to how the regimes for PAYE, VAT and capital gains relating to UK property currently operate).

The Government’s desire to reduce the period between a tax payment falling due and tax actually being collected is understandable. However, bringing the collection of income tax into real time will create significant administrative problems. For example, for any individual in self-assessment whose income receipts are irregular, how will HMRC correctly anticipate the right marginal rate of income tax to apply?  Or will an individual enjoy tax free income during the first few months of the tax year and then have to pay gradually escalating amounts of income tax as the tax year progresses and they move through the income tax bands?

The difficulties are particularly acute when considering how this policy might be applied to the various benefit regimes (for example, the Transfer of Assets Abroad regime, the Settlements Code and the taxation of offshore income gains realised by non-UK resident trusts).  Equally difficult is the question of how complex regimes and reliefs can be applied in a way that does not involve taxpayers and their advisers dealing with compliance throughout the tax year.

The consultation also asks whether similar changes could be made to the collection of capital gains tax.  The Government concedes that this will create specific difficulties, not least because capital gains tax involves an annual calculation. They are right. Taking, for example, the taxation of capital gains that arise to non-UK resident trustees, it is hard to see how the existing regime (s.87 Taxation of Chargeable Gains Act 1992) could be made to work in real time when the calculation of gains that are available to be matched to benefits can only take place at the end of the tax year. 

There will be some areas where “real time” tax collection is more straightforward. But any reforms will need careful thought. No doubt the Government will receive detailed responses from stakeholders.