Office of Tax Simplification – cutting core reliefs?
Who would have guessed that the Office of Tax Simplification (OTS) set up by the Government in July 2010 to remove reliefs which:
- Were largely historic,
- Were not frequently used;
- Create distortions in the tax system; or
- Are used by a number of taxpayers but that are complex for business and/or HMRC to administer
would be advocating the removal of some core reliefs which Wills, Probate and Trusts practitioners might have regarded as sacrosanct.
The OTS was set up in July to advise the Chancellor on how to reduce complexity in our tax system. It first of all published on 8 November 2010 the first ever comprehensive list of all the UK’s 1042 tax reliefs and allowances along with the group’s suggested criteria for review.
In December 2010 it produced its interim report showing what would happen if it applied this criteria to a small cross section of reliefs so that we have time to comment before they apply the criteria to the full list in time for including the necessary changes in the 2011 Budget.
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I encourage you all to read the report at and to provide feedback.
The OTS have decided to focus on 74 reliefs initially and a further 75 if time permits. Its review takes into account the impact of removing or simplifying individual reliefs, both for specific taxpayers and the wider economy and the Government’s wider objectives for the tax system – i.e. the need to be internationally competitive, support fairness and provide sustainable revenue.
The provisional criteria used in the interim report were:
- Whether the policy rationale for the reliefs is still valid and whether it remains the optimal method to achieve the policy objective, given other potential Government interventions
- Evaluation of whether there is currently a policy rationale for the relief
- The likely impact of changing or repealing the relief or exemption
- Evidence of taxpayer take-up and awareness of the reliefs
- Evidence of complexity, compliance costs and administrative burdens in claiming the reliefs
The use of the criteria was weighted for each relief which was looked at on a case by case basis.
In the sample of reliefs used to test these criteria there are a couple familiar to the Wills, Probate & Trust practitioner:
- CGT relief on disposal of private residence
- Income tax exemption for National Savings Bank ordinary account interest
The CGT relief on the disposal of a private residence is deemed, on the above criteria, to be necessary to retain as the rationale behind it was to encourage home ownership and to assist both social and labour mobility. This rationale remains, particularly as it keeps many people out of completing a self assessment tax return and prevents the property market stagnating.
However, due to the numerous conditions causing complexity in other than straightforward cases it is proposed that these conditions be rewritten in a simpler format; be reviewed to test which are still appropriate and researched to see whether any can be streamlined.
Interest arising on deposits in Ordinary Accounts with the National Savings Bank is exempt from income tax if the annual amount does not exceed £70, any excess over this amount is liable to income tax. The origin of the National Savings Bank was to encourage people to provide for themselves against adversity and ill health. Although the rationale remains valid these accounts no longer exist. Existing deposits were transferred to an account which either does not pay interest at all or pays taxable interest at a rate of 0.1%. Unsurprisingly, the OTS recommends the relief is abolished.
The OTS meets next on 12 January 2011 when it expects to have had feedback on the application of the criteria and their methodology from all those interested and will get to work on applying it to all 74 reliefs it has highlighted and maybe another 75 in order to be able to publish its final report before the 23 March 2011 Budget.
If you are therefore interested in how this criteria may apply to the following you had better get a missive off to the OTS before 12 January:
- CGT Entrepreneurs’ Relief
- CGT Principal Private Residence Relief
- CGT chattels exceeding £6,000 in value
- Income tax – blind person’s allowance
- IHT – Loss on sale reliefs
- IHT – Potentially exempt transfers
- IHT – Taper relief
If time permits the review will extend to the following (amongst others):
- S.58(1)(b) IHTA 1984 – various trusts
- IHT – APR
- IHT – annual exempt amount
- IHT – BPR
- IHT – changes to deceased’s estate under ss 17 & 93
- IHT – conditional exemption & it application to relevant property trusts – ss 30 & 79
- IHT – fall in value of transfers within 7 years of death
- IHT – gifts on marriage & civil partnership
- IHT – reversionary interests
- IHT – Woodlands relief
Without doubt the UK tax system is complex and in desperate need of an overhaul. The sheer length of the tax legislation has been mind boggling and this only adds to the administrative burden on individuals and businesses and gives rise to mistakes.
If however, fundamental reliefs such as potentially exempt transfers and APR and BPR are up for substantive review or even abolition one wonders why Inheritance Tax itself is not being re-considered. It is at once familiar but also full of conditions and subjective provisions which make it difficult to apply fairly or easily in some cases. The propping up of the gifts with reservation of benefit regime with the Pre-Owned assets tax system may well have closed an important perceived loop hole but the added complexity is just not worth it. Far better to start again.
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