The Tax Gap UK

What is the Tax Gap?

The Tax Gap (which applies to Inheritance Tax as well as other taxes) measures the difference between the amount of tax the Treasury think it should be getting and what it has actually received.

Collecting all of the tax

HMRC is aware that it is virtually impossible to collect absolutely all of the tax that is owed to them.  Legal interpretation, avoidance, evasion and criminal attacks on the tax system along with simple errors and careless mistakes made in self assessment calculations all contribute to create this tax gap.The amount of Inheritance Tax (IHT) the Government received in 2016/17 reached a record high of £4.84 billion.  This was an increase of 4% compared with the 2015/16 tax year which raised £4.7 billion.  Interestingly, the gap between tax received and tax owed has grown from £575 million in 2016/16 to £600 million in 2016/17, a 4.3% increase which is roughly in line with the increase in tax taken.

IHT as one of the most complex taxes

It is fair to say that Inheritance Tax is one of the most complex taxes in the system, and there is considerable scope for individuals to organise their affairs in a way which reduces the amount of tax which they pay.  In its current form, IHTs complexity actually encourages behaviours which are detrimental to sensible financial planning and the distribution of wealth through generations.Because the rules are sometimes so irrational there is definitely an element of accidental evasion by those who don’t take professional advice.   The new main residence nil rate band was intended to take normal people out of IHT but it is so complex that people are missing out on its benefits.

IHT system review

The Government has ordered a review of the IHT system which the office of Tax Simplification is currently working on, but the results of the review and any consequent amendments thereafter are unlikely to be rapidly implemented.  Once the new system is in place however it should be simpler for taxpayers and theoretically a higher proportion of the tax due can actually be collected.

Summary

Part of the reason that IHT receipts have grown is the increase in property prices, which in turn causes the absolute amount of tax gap to increase.  The effective simplification of all IHT tax rules is the vital component in closing the tax gap for HMRC. Currently as a population we have asset rich baby boomers, asset poor millennials and a ticking tax bomb.   In order to maximise the efficiency of your Inheritance Tax planning you need to speak to an impartial experienced professional. Don't keep postponing it. Contact us now for effective advice.