The Death of Inheritance Tax as we know it?

26 February 2020

A radical overhaul of the current UK Inheritance Tax (“IHT”) system has been recommended by a group of MPs. The All-Party Parliamentary Groups (APPG) for Inheritance and Intergenerational Fairness has published several bold suggestions which, if adopted, would represent the biggest change to IHT as we know it for many a decade. The report has been compiled in light of the IHT system’s perceived unfairness and unnecessary complexity. It states that fewer than 5% of deaths actually result in the payment of any IHT. It is fair to say that IHT is a hot and sensitive topic at the moment, with the Office of Tax Simplification also publishing findings on a review of the system last year and making other, much less dramatic, suggestions for change. 

The APPG report recommends replacing the current 36% and 40% death tax rates, as well as the 20% rate on chargeable lifetime transfers, with a flat-rate “gift tax” of 10% on all lifetime and death transfers. This would increase to 20% for estate value over £2million. All pension funds left at death would also be taxed unless they are passing to a spouse. Under current rules, a person’s exposure to UK IHT in the first place is dictated by their domicile status. It is recommended by the APPG that a person’s domicile is abolished as a connecting factor for IHT. That person’s exposure would instead be based on the number of years of UK residence and the situs of their assets. 

With the exception of spouse and charity exemptions, all IHT reliefs would be abolished. The most controversial withdrawals would likely be Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”) which are extremely valuable to many estates and family businesses. The APPG have sought to temper this with a recommendation that any IHT payable on assets which would have qualified for APR and BPR will have the option to pay the liability in 10 equal annual instalments. 

In place of the current reliefs, an annual lifetime allowance of £30,000 on lifetime gifts would be available, as would a Death allowance at a similar level to the current IHT Nil Rate Band of £325,000. 

For Trusts, it is proposed that an annual IHT charge is applied based on the value of assets held within the Trust and when assets leave the Trust. This is stark when compared with the current regime which requires Trustees to only look at these matters every 10 years or when assets leave the Trust. The annual charge would be carried if assets are illiquid, such as residential properties. Disabled Person Trusts would continue to be subject to special rules. 

As part of the changes suggested, the uplift in the value of assets for Capital Gains Tax (“CGT”) purposes on death will also be abolished. This could significantly increase the CGT exposure for Executors and estate beneficiaries. 

The APPG recommendations are very interesting but it remains to be seen to what extent they are taken on board and implemented, if at all. There can be little doubt that the move away from “7 year-clocks” and varying tax rates would result in major simplification of the system. However, the wholesale removal of current reliefs, APR and BPR in particular, is likely to be met with fierce opposition. Transitional provisions would also need to be considered, for example for persons who have made gifts in years shortly before any changes and for established Trusts. We would, therefore, expect that there is a still a way to go before we see sweeping changes but, given the current political climate, we won’t be betting on it! 

By Lisa Tait, Private Client Senior Manager.

For more information on Lisa and the Private Client team, click here.

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