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Reform of Inheritance Tax

View profile for Andrew Welch
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Do I need to instruct a solicitor if I am the personal representative of an estate?

The All Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness (APPG) reported in January 2020 with some radical proposals for reform of Inheritance Tax (IHT). The group was set up to facilitate methods of reform to deal with inheritance and intergenerational fairness issues.

As it identified in its report, IHT “is often criticized as complex, ineffective, riddled with anomalies, distortionary and unfair. It is unpopular and ripe for reform”.

However the report also identified that out of about 588,000 deaths a year only 24,500, less than 5%, result in payment of IHT. Interestingly in surveys of public opinion some of the most vigorous objectors are people who will probably never end up paying it, which suggest it is a little understood tax.

The APPG felt that although IHT only raises less than 1% of the total government tax take it encourages wealth to be concentrated rather than disseminated through wider society and the economy during people’s lifetimes.

The group had two major proposals

  • Replacing IHT with a tax on lifetime and death transfers of wealth, with very few reliefs and a low flat rate, between 10% and 20%,with the Capital Gains Tax (CGT) tax free death uplift being abolished.

  • HMRC and HM Treasury to be given greater powers to collect data through compulsory reporting of lifetime gifts – this would allow the government to redesign wealth taxes using data that it currently does not have.

Within these proposals, particularly the first, there was lots of further detail relating to matters such as Trusts and Foreign Domiciles. However some the key additional points were that people should be able to make tax free lifetime gifts of up to £30,000 per annum, which would encourage lifetime distribution of wealth to other generations more effectively than the current £3,000 gift exemption, and cover all but the very wealthy. The £325,000 Nil Rate Band would remain, but only on death, and the Residence Nil Rate Band would be abolished. The tax rate would be dropped to 10% on most estates because it was felt that that was a level which would not make incentives to plan around it worthwhile. It is said that for most estates this arrangement would not increase the overall tax bill but it would be simpler and encourage lifetime distribution of wealth.

However there are some recommendations which would not please some taxpayers. In order to simplify and remove the complex reliefs APPG recommended abolishing Business Property Relief (BPR) and Agricultural Property Relief (APR). They recognise the hardship that that may cause to some family businesses and farms but say that that is mitigated by the lower tax rate and possibly payment over 10 years. They point out that now beneficiaries could inherit a BPR qualifying business free of IHT then go on to sell it shortly afterwards and pay no Capital Gains Tax (CGT) either.

Another detail in the proposals which may prove controversial is the abolishing of the CGT tax free death uplift. At present beneficiaries inherit assets at the value on death which means that often no CGT is payable if they are disposed of shortly after. APPG propose no CGT being payable on the death of the donor but the donee inherits at the donors cost base. Translated to the typical family situation, the children could inherit the family home but at the costs base applicable years ago when parents bought it. When those children come to sell there could be a substantial CGT bill to pay assuming they don’t live in it and qualify for main residence exemption. APPG suggest that could be mitigated by deducting a principal residence relief for the period when the donor was in residence. However it does illustrate that under these proposals CGT would become a more significant feature of death tax planning.

Are these proposals likely to come into effect and if so when?

Realistically, probably not anytime soon. APPG is an informal group of members of both Houses of Parliament that have a common interest in these issues. It does not play any part in the legislative process and ministers are free to take or leave its suggestions.

The Office for Tax Simplification (OTS) also reported to the then Chancellor on wealth taxes in 2019, although its remit was to suggest reform rather than replacement of IHT. The present Chancellor in his March 2020 budget did not take up either the APPG or the OTS suggestions or give an indication that he was likely to do so.

Coronavirus and the likely need to raise taxes as a result may prompt a revisiting of wealth taxes but what is raised by IHT now is a modest proportion of government tax take and some very major changes would be needed to increase that substantially. The APPG suggestions are not aimed primarily at increasing the tax take but at making it administratively easier and, they say, fairer.

However the political appetite to make major changes to IHT is unlikely to be there. The OTS described IHT as “almost uniquely unpopular”. Politicians for decades have sought to avoid becoming mired in the reform of it and, if anything, the trend in recent times has been mitigate it for many estates with the increasing Residence Nil Rate Band. Therefore it seems unlikely that it will be top of the present governments’ list of priorities for change.

But we live in uncertain times and only the very brave would rule anything out, especially given the amount of wealth tied up in assets and the likelihood of future governments need to raise the tax take.  

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