Proposed changes to inheritance tax

Proposed changes to inheritance tax

Spring Budget 2020: what do employers need to know?

The All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (“APPG”) has recently published an informal report into inheritance tax (“IHT”) and has made a number of radical recommendations over the abolition of the tax in its current form, to be replaced with a new system based on the taxing of gifts made during lifetime and on death.


Overview of the recommendations

IHT is almost universally disliked by the public as it is perceived to be too complex and unfair.  Following two recent reviews by the Office of Tax Simplification (“OTS”) into potential reforms to the tax, the APPG report suggests replacing the current IHT regime with a flat-rate gift tax payable on both lifetime transfers and on death at a rate of 10%, increasing to a rate of 20% on death for estates in excess of £2m.

In addition to this sweeping change, all current IHT reliefs other than the spouse exemption and charity exemption would be abolished, including the complete removal of Business Property Relief (“BPR”) and Agricultural Property Relief (“APR”).  The ability under the current regime to make lifetime gifts to individuals without triggering IHT (subject to a “tail” if the donor dies within seven years of the gift) would also be removed.  Instead, any gifts made in excess of an annual allowance of £30,000 would be subject to an immediate charge to tax at 10%, with all gifts in excess of £10,000 requiring compulsory electronic reporting.   The annual £30,000 allowance would replace all of the other small allowances, including gifts out of excess income.  This single annual allowance may provide simplicity but could significantly curb lifetime planning opportunities particularly for high earners.

The “nil rate band” (presently £325,000) which can currently be set against gifts made in the last seven years of life and on death would no longer be available.  This would be replaced with a death allowance at a similar level to ensure that small estates not currently paying IHT would remain unaffected by the changes.

Together with changes to the IHT regime, the report suggests that the current tax-free rebasing of assets at death for capital gains tax (“CGT”) purposes should be removed.  Assets would instead pass on death at their original acquisition cost.  This is likely to cause practical difficulties in ascertaining the original cost of long-held assets. 

The rules for trusts would also be simplified.  A transfer to a trust would trigger a 10% charge (if over the £30,000 annual allowance) – there would be no nil rate band to mitigate this charge.  An annual charge would be levied on assets held in discretionary trusts and when property comes out of discretionary trusts.  The level of these charges is not addressed in the report.

Who would this affect most?

The abolition of BPR is particularly controversial and will have significant ramifications for current business owners.  The APPG recommends that where tax arises on business assets, there should be an option to pay this in instalments over a 10 year period. This is likely to be of little comfort to those that this will affect.  If the proposals are implemented, entrepreneurs will no longer be able to gift business assets without triggering upfront tax charges and so they should consider whether gifting would be appropriate while this option remains available.

The report also suggests that the concept of domicile should be abolished as a connecting factor for IHT.  Instead, all individuals who have been resident in the UK for 10 of the preceding 15 years would be subject to UK IHT on their worldwide assets.  When coupled with the report’s proposed changes to trusts established by non-domiciliaries, is likely to bring a lot of people within the UK IHT net for the first time and may have a material impact upon planning opportunities.

Next Steps

While the report is not an official publication from Government, it does show a potential direction of travel. Although substantive changes to legislation would likely require a period of consultation, the Government could make changes within the Budget on 11 March 2020, and as such consideration should be given to any steps which should be taken and the timing of potential lifetime giving.

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