Changes to tax that may affect moderately wealthy families
The Government recently held a ‘Tax Day’ to explain their current thinking about, among other things, the development of the taxation of estates. Professional advisers had feared that several serious changes would be announced but, in the event, that was not the main area of discussion. As I set out in my article ‘Looking after the family finances in the aftermath of the pandemic’, I am not convinced that the risk of significant tax increases for moderately wealthy families has receded. If I am right, we are now in something of an Indian Summer before harsh tax winds blow though the country.
In this summary of the recent paper from H M Revenue & Customs (HMRC) I will ignore issues that do not usually directly impact families but sadly, that does still leave many areas of concern.
Increased use of computers
Over the last few years, many regional tax offices have been closed. The relationship between the tax inspector and the taxpayer is no longer face to face, as it used to be when things got serious. Gone are the days when a taxpayer could actually speak to an inspector to sort out a problem.
We have become used to filing our annual tax returns by internet, often using proprietary software to help us. This process will intensify under the banner ‘Making Tax Digital’ (MTD), the main effect of which is to throw a greater burden onto the taxpayer and to save work and thus time for HMRC. At present only larger businesses are subject to the most rigorous reporting obligations but soon even private individuals may find that they must report their rental income from let properties, and pay any tax due, quarterly rather than yearly.
The Government intends to legislate this year to bring normal income tax under self-assessment within MTD with effect from April 2023. Families with income received gross, such as rents or the profits of a small freelance consultancy, will have to decide whether the income earned is worth the bother of having to report it. The extra compliance burden may force some private landlords to leave the market and some consultants to retire.
Individuals will be forced to set up an individual digital account and customer record. This is the ‘Single Taxpayer Account’ described in my article ‘So: what about CGT: has there been a reprieve?’.
Trusts must all register with HMRC; in future even those trusts that have no income, and make no gains, will be drawn into the fairly complicated and time-consuming process of registration, incurring expense whilst possibly not actually yielding the State any tax.
Increased Revenue powers
There is an excellent little article by David Goldberg QC in GITC Review, Vol XVII, ‘Lockdown thoughts’, which really resonated with me. He writes:
A fair society is not created by providing for the poor or relatively poor while over-burdening the rich: it is created by balancing rights and obligations, by ensuring that those made subject to State power have remedies if those powers are over-used.’
He is right: we tax consultants should never be afraid to stand up for our clients when they are harshly treated by HMRC.
Raising standards
The Government wants to raise the standard of tax advice. It is considering a requirement that all advisers should have professional indemnity insurance. I personally would welcome this: I have always had this insurance, which is costly but gives peace of mind. All tax advisers should take out this cover: it is as basic as choosing to deal only with a travel firm that has insolvency cover to get you home when things go wrong.
There is an indirect advantage to clients in all this. Insurers expect advisers to be members of professional organisations; those organisations require members to observe specific standards of conduct. My insurers, for example, will not offer cover where advisers get involved in certain ‘dodgy’ tax schemes.
Inheritance Tax and probate applications
There is some good news here, set out in the Annex to the Tax Day report. See also my separate article ‘Inheritance Tax Update: notes for Executors’.
At present, we have three main ‘tiers’ of tax returns for Inheritance Tax (IHT). Series 1 is used to report IHT events relating to discretionary trusts and one or two other rather rarefied situations. Series 2 is used for the simpler, smaller estates. Series 4 is appropriate where the estate is large or complicated and where there will by IHT to pay. The Office of Tax Simplification recommended the introduction of ‘a very short form’ for the simplest estates. The government proposes to remove over 90% of estates from the need to report to HMRC when applying for probate.
What may not be quite so helpful is the emphasis on the use of online tools and reports. Solicitors have not found the online system easy to navigate. When an estate needs the full IHT400 and supporting schedules, it is not really practicable to try to complete the form on screen: there will always be detail to look for, so it is far easier to complete a draft in hard copy.
Where the executor is reasonably au fait with online tools, the process may be straightforward; but the elderly (and bereaved) family member, who is not blessed with good and clear records of assets nor of details of lifetime gifts made by the deceased, will struggle and will get little help from HMRC, who are unlikely to provide meaningful telephone support.
The solution for kind but elderly people is:
- to talk about death and taxes with the younger generation;
- to tell them where all the records are;
- to give them passwords for digital accounts and assets; and
- to keep a note of lifetime gifts (and where appropriate evidence that income was sufficient to support a claim under s21 IHTA 1984).
Be prepared
Those of us who grew up in the world of cubs, brownies, scouts and guides have lived with this motto. If I am right, now is the time for families to review their situation, to see if they can afford to make lifetime gifts to save tax later, and to update wills if need be. I fear that tax increases may come quite suddenly, catching people out. Do not be among that number.