Radical changes to Inheritance Tax

Posted by ianpascall - June 16, 2020 3:03 pm Radical changes to Inheritance Tax may be on their way

On 29 January 2020, the All Party Parliamentary Group (APPG) published an informal report on the reform of Inheritance Tax (IHT). While many such reports are published by MPs, it follows two recent Office of Tax Simplification (OTS) reports on Inheritance Tax (IHT).    The APPG report considers a range of reform options but its key recommendations would, if implemented en masse, make radical changes to both simplify IHT and lower the tax rate charged.

Indeed, had there not been a last minute change of Chancellor, and Covid-19 issues on the horizon, some or all of the changes might have been implemented in the 11 March 2020 Budget. As the changes did not happen, it is expected that they will feature in future Budgets.

So, what has been proposed?

Lower rates and fewer reliefs

There is an increasingly widespread view that current reliefs and exemptions from IHT are in some cases outdated, and in others abused, as families seek to reduce the tax suffered when assets are passed down to the next generation.  The APPG report recommends that the most widely used reliefs (e.g. the 100% exemption for lifetime and death gifts to a spouse and gifts to charities) and the nil rate band (which has been at £325,000 for many years) are maintained. It suggests, however, that gifts out of income, and 100% agricultural (APR) and business property (BPR) exemptions are abolished. 

The APPG suggests that many small reliefs are abolished and replaced with one simple annual exemption of £30,000.  Where this is exceeded, the proposal is that a lifetime rate of 10% is applied (as compared with the current rate of 20%). There would be no further charge on lifetime gifts at death.

The APPG also recommends reducing the IHT rate of tax payable on death from 40% to 10% for estates worth up to £2m, and to 20% for the balance of the estate over £2m.

Removal of capital gains tax uplift on death

Currently, on death, no capital gains tax (CGT) is payable and the assets are uplifted to market value (“Probate value”). Therefore, assets can be sold shortly afterwards with no Capital Gains Tax (CGT). Further, where an asset is exempted or relieved from IHT through APR/BPR the CGT uplift means that the asset can be sold without either IHT or CGT payable.

The APPG suggests that instead of beneficiaries inheriting assets at their probate value, they should inherit the deceased’s original acquisition cost for tax purposes. This would often mean that CGT arises if a beneficiary sells the inherited asset, and creates practical issues in identifying the original cost of an asset that may have been bought decades earlier.

Other suggestions

  • All single gifts over £10,000 should be reported on tax returns.
  • The rules for trusts would be simplified, but an annual charge would apply to them.
  • Where IHT arises on business assets, tax can be paid in instalments over 10 years, interest free.
  • The concept of domicile is removed, and that IHT applies to the worldwide assets of all individuals who have been resident in the UK for 10 out of 15 years.
  • Removal of the gifts with reservation of benefit rules.
  • To charge un-used pension funds.

What next?

The Government may wish to open the proposed reform to consultation as it is such a major change in tax policy. Even if consultation does go ahead, interim “reforms” may be announced, perhaps described as “anti-forestalling” measures to prevent avoidance. IHT currently raises about £5.4bn per year, and this is not expected to change as a result of the proposals. 

The UK’s IHT rules have not changed for many years but there is clearly potential for significant changes in the next couple of years.

We will, of course, keep our clients appraised of any changes and, in the meantime, if you would like to discuss how these potential changes could affect your family’s finances, please speak with your usual MFW contact.