IHT faces "top-down review" by OTS

Inheritance tax (IHT) should undergo a full-scale review and parts of business capital gains tax (CGT) could be overhauled in a widespread shake-up of the UK tax system.

IHT provisions and reliefs would  be repealed, simplified or increased in line with inflation where necessary, the Office for Tax Simplification (OTS) says.

This "long-term project" would include a review of the taxation of trusts, which are often used to pass family assets between generations, it says.

On business CGT, scraping the relief for indexation would make computations simpler and reduce administrative costs for both companies and for HMRC, the OTS says.

It says the calculation of indexation is a common source of error, and calls for a consultation to abolish it.

Alternative mechanisms which could be used to exclude the inflationary element of gains without increasing complexity will also be looked at, it says.

It gives the example of capital gains tax on share disposals paid by insurance companies which could potentially be swept into a wider reform of insurance company taxation.

The OTS would also consider the impact of the steady lowering of the corporation tax rate, and whether it offers scope for a "radical" approach to corporate capital gains.

However, the Office says capital gains tax charges for individuals, which have only been in existence for three years, will be allowed to "bed in" and will not be part of the review.

The OTS makes the proposals in the report on its initial review into rationalising Britain's tax system, which critics claim is one of the most complex in the world.