Proposed Reforms to Inheritance Tax
Intergenerational Fairness
Inheritance tax (IHT) always has and always will face hostility. An opinion poll in 2015 showed 59% opposed it, making it the UK’s least popular tax. In that same year, research by the Fabian Society found people from across the political spectrum disliked the levy because it was imposed at a time of grief on money which the deceased had already paid tax.
As a result, intergenerational fairness increasingly rises up the political agenda and in February 2019, the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPG IIF) was established for the specific purpose to promote greater understanding of the issues generated by inheritance and intergenerational fairness.
On 29 January 2020, the APPG published an informal report on Reform of inheritance tax (IHT). This report comes at a time when many are expecting a range of tax reforms. The report considers a range of reform options but its key recommendations look to simplify IHT and lower the tax rate charged. Of course, this does not necessarily mean that the amount of IHT collected (circa £5.4bn a year) would fall. N.B, in 2015, it made up less than 1% of the total tax take and only about 4% of estates pay it.
The report highlights that IHT (described as a voluntary tax), is paid for the most part by those who have not planned their tax affairs adequately. Increasing, it is acknowledged that current reliefs and exemptions from IHT can be unfair and complicated, are in some cases, somewhat outdated. Moreover, many of the reliefs and exemptions are almost exclusively taken advantage of by those who can afford the specialist advice and guidance to help families mitigate IHT, thus protecting as much of the estate for future generations.
APPG Recommendations
The APPG report recommends the following reliefs and exemptions remain in place:
the nil rate band (currently the first £325,000 of each individual’s estate);
the spousal exemption (100% exemption for lifetime and death gifts/transfers to a spouse or civil partner);
gifts to charity
Conversely, they suggest the following are abolished, as in their view, they play a key part in the estate planning of wealthy individuals:
lifetime gifts made more than seven years before death;
gifts out of income;
business and agricultural property 100% exemptions are abolished: as, in their view, these reliefs frequently play a key part in the estate planning of wealthy individuals.
Other recommendations include:
one simple annual exemption of £30,000 to replace others such as the annual and small gifts exemptions;
where this annual allowance is exceeded, a lifetime tax at 10% should be applied, which is half the current 20% rate for chargeable lifetime transfers;
single gifts over £10,000 should be reported on tax returns and that the rules for trusts would also be simplified, but an annual tax charge would apply to them.
The current rate of IHT on death is 40%. This is applied on what is left in the estate (the residue) after any available nil rate band, residential nil rate band and other exemptions are applied. The APPG proposes that the rate is reduced to 10% on taxable amounts up to £2m. Thereafter, 20% on the remainder.
Business Assets and Capital Gains Issues
As far as agricultural and business assets are concerned, any abolition of the current reliefs would have probably have significant negative implications for the owners and their beneficiaries.
The APPG also suggests that instead of beneficiaries inheriting assets at the value as at the death of the testator, the value should be set as the original acquisition. It’s clear this would create an administrative burden in trying to identify the original cost, especially if purchased some time ago and where no paper-trail exists. Moreover, it would would often mean capital gains arises if a beneficiary sells the inherited non-exempt asset.
The Foreign Element
The report also suggests that the concept of domicile is removed from the new rules and that the tax applies to the worldwide assets of all individuals who have been resident in the UK for 10 out of 15 years, as well as taxing trusts that they have created where a UK resident can benefit from them.
What Happens Next?
It’s unlikely Rishi Sunak (Chancellor of the Exchequer at the time of writing) will implement the recommendations in this March’s budget. Perhaps more likely is a review and then implementation from April 2021 or later.
Read the full APPG report.
CONTACT TWB
It is always important to review your circumstances as family life evolves and when cultural, political and tax legislation changes occur. Keep up to date with developments and seek expert advice from firms like TWB, but know that TWB is at the forefront of its profession.
Estate Planning is an integral part of our service. As well as minimising the effects of IHT, many families wish to ensure the preservation of their wealth through several generations by making provision for children, whilst also considering events such as divorce, bankruptcy and accounting for later-life care. We have written thousands of Wills and helped countless clients with IHT planning, Lasting Powers of Attorney (LPA) and much more.
Contact Jules Jack for more information: julesj@twb.org.uk - 020 8920 3360