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What impact will Tax Day 2021 have on you?

The 23rd of March was the UK’s first ever ‘Tax Day’.  The Treasury used it to unveil a number of new tax policies but now the announcements have been made, we thought it may be helpful to cover the potential impact Tax Day 2021 could have on you.

It was interesting to note although many of these policies took a more long-term view, there were certain changes to Inheritance Tax (IHT) that may have a more immediate impact.

How has Tax Day changed Inheritance Tax?

The first change to IHT should probably be considered good news.

The amount of ‘red tape’ surrounding Inheritance Tax will be reduced.  From the start of 2022 more than 90% of non-taxpaying estates will no longer have to complete IHT forms for deaths when probate or confirmation is required.

It is worth noting that although the Office of Tax Simplification has not yet confirmed the wider reform of CTG & IHT rules along the lines that were proposed in 2020,  it is thought that while the need for form filling may be removed for the majority, technology will be deployed to provide a digital solution.

The Treasury’s policy document explained the change in more detail:

“Following recommendations by the Office of Tax Simplification, the Government will reduce administrative burdens for those dealing with Inheritance Tax.  Reporting regulations will be simplified later this year so that from January 1, 2022 over 90 percent of non-taxpaying estates each year will no longer have to complete Inheritance Tax forms for deaths when probate or confirmation is required.”

The document goes on to say:

“In addition, the current temporary provision for those dealing with a trust or estate to provide an Inheritance Tax return without requiring physical signatures from all those involved will be made permanent.  Reporting regulations will also be updated to clarify the requirement for estates to submit an Inheritance Tax account where the deceased was never domiciled in the UK but owned indirect interests in UK residential property.”

According to an accompanying statement from Jesse Norman, the Financial Secretary to the Treasury, this change has been made to deliver on the Government’s earlier promises to “cut red tape and make the tax system as simple as possible for people to use” and “remove unnecessary paperwork and obstacles so that taxpayers can manage their affairs with less effort.”

It is important to note, however, that under the new policy estates will be required to submit an IHT account if the deceased wasn’t a UK domicile but did have a financial interest in residential property in the UK.

How has Tax Day 2021 changed tax on trusts?

The quick answer is that tax on trusts will not immediately feel the impact of Tax Day 2021.

The Government has decided against overhauling tax on trusts in the short term.  Instead, they said they will review specific areas on a case-by-case basis as, following a lengthy consultation, they felt there was no immediate need for a “comprehensive reform of trusts at this stage”.

The government did however table several of the criticisms of the current trust system that they had received from respondents during the consultation.

Some felt the traditional entry charges required to start a trust added complexity, made trusts a less attractive option, and did not positively affect the performance of a trust versus alternative approaches.

Others argued the fact unlimited gifts can be made before death without incurring an IHT charge had left trusts “out of step”.

Others warned that as a charge of up to 6% is imposed on a trust every 10 years, the amount collected over a 30-year period would be the same as an IHT bill on an individual’s death, there was currently a very realistic risk of “double charging”.

Others called for charges to be revised for trusts involving moving assets from adults to minors while some criticised the existing reporting and disclosure regimes governing the use of trusts.

Although the changes announced on Tax Day were limited, if you’d like to ask us any questions related to Inheritance Tax, Trusts or Estate Planning in general, please email deniece.lines@collinshoy.com or call Deniece on 0208 866 1820.