Inheritance Tax – simplify it or scrap it?
Feb 07, 2020
Personal Finance Tax
When the Chancellor makes his Spring Budget speech on 11 March, it will be worth taking note whether he acts on any of the recommendations from the Office of Tax Simplification (OTS) regarding Inheritance Tax (IHT). As we reported in an earlier article, the OTS has suggested simplifying IHT on lifetime gifts, including reducing the period of potential exemption from seven to five years. Such a change would mean that a donor would only need to survive for five years after making a gift for the transfer to be considered exempt from IHT.
The OTS has also suggested that the conditions for Business Property Relief (BPR) could be tightened up, by aligning the rules with the definition of a trading company for Capital Gains Tax purposes. BPR relief currently provides 100% relief on the transfer of shares in an unquoted company. The suggested change would mean that more transfers of shares would potentially be liable to IHT and may require a careful review of your plans if you are looking to pass on your business.
Should IHT be scrapped altogether?
The latest news, announced on 29 January 2020, is that the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPG IIF – a snappy acronym!) has published a report in which they recommend abolishing the current system of IHT altogether. MPs in the group claim that in its existing form IHT is “complex, ineffective, riddled with anomalies, distortionary and unfair”.
They propose introducing a completely different system, which replaces the existing assortment of IHT reliefs and exemptions. Instead of the 40% rate which is currently levied on estates above the nil-rate band, the suggestion is to reduce this to a flat-rate of 10%. The APPG also recommends abolishing altogether the seven year rule for potentially exempt transfers, as well as Business Property Relief and agricultural relief.
Rather than a variety of gift allowances, the APPG proposes one annual tax-free personal gift allowance of £30,000. Any gifts exceeding £30,000 each year would be taxed immediately at 10%.
If an estate is valued over £2 million, then the flat-rate of 10% IHT would rise to a maximum of 20%. This 20% cap has been suggested as the highest rate that people will pay before they start having recourse to tax planning incentives, so cutting the rates would aim to reduce tax avoidance.
The current nil-rate band would be replaced by a ‘death allowance’ which would be set at a similar level to the current nil-rate band of £325,000. This would only be available on death, and would be irrespective of any previous gifts given during an individual’s lifetime.
The APPG’s report also calls for HMRC to collect more data about larger lifetime gifts, so that more analysis can be undertaken about transfers of wealth.
Whether the Treasury takes on board any of the APPG’s recommendations remains to be seen. IHT makes up a considerable part of the UK’s public finances, and despite it being so complicated that it would seem easier to scrap the whole thing and start again, the government may well have other ideas.