A group of MPs are calling for inheritance tax (“IHT”) to be abolished in its current form and replaced with a flat 10 per cent rate.
In a report last month by the All Party Parliamentary Group (“APPG”) on Inheritance Tax and Intergenerational Fairness, MPs recommended the government change the current system which was “complex, ineffective, riddled with anomalies, distortionary and unfair”.
The report suggests that most IHT reliefs should be abolished in favour of a flat rate system of 10 per cent rising to a maximum of 20 per cent on estates at death. The MP’s cite evidence which seem to suggest that keeping the tax rate around 20 per cent disincentivizes tax planning and would result in less administration and tax avoidance.
However it is crucial to note that the APPG is an informal group of cross party MPs and House of Lord’s members with a common interest, as such it is certainly likely that nothing much will come of them. Even so, radical recommendations such as these can have an impact on government policy; especially where they have gained public traction. So it is certainly worth being aware of the proposals.
What Is Being Proposed?
- The APPG has proposed that inheritance tax, which is currently charged at 40% on estates worth more than £325,000 (£650,000 for married couples), should be replaced by a flat of tax of 10%, rising to 20% where the estate is valued at more than £2m.
- The majority of IHT reliefs, such as Business Property Relief (BPR) and Agricultural Property Relief (APR) would be abolished, in an attempt to simplify the tax.
- The spousal and charity exemptions would remain however.
- The uplift for Capital Gains Tax (CGT), whereby assets are rebased on death, would also be abolished.
- A gift tax would be brought in, with a 10% charge to tax on gifts over £30,000.
- The spousal and charity reliefs would remain however.
- The current 7 year rule system, where gifts made within seven years of death are brought back into tax for IHT purposes when someone dies, would be abolished.
Is Reform Needed?
The Office for Tax Simplification (the OTS) called for simplification of IHT in its report in July 2019.
At present, it is estimated that fewer than 5% of estates pay inheritance tax and there is widespread dislike of the tax among the public. There is a perception that the very rich are able to avoid this tax through the use of tax planning, whilst families whose wealth is mainly tied up in their home cannot.
The Residence Nil Rate Band, the additional allowance that was introduced in 2017, allows individuals to have a higher tax free allowance when they pass on wealth in their home to their descendants. However, it is argued that this system is unnecessarily complicated and discriminates against those who do not have children or who do not own residential property.
So What’s Next?
It is likely that there will be a full consultation process before any reforms are implemented, so any changes probably won’t take effect for some time. It will however be interesting to see whether any changes are announced in the Budget on March 11 2020.
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