Recently an All-Party Parliamentary Group for Intergenerational Fairness (APPG IIF) published a report which recommends the abolition of Inheritance Tax in its current form. Here, we look at main reasons leading to the publication of this report and take a look at the recommended changes to this deeply unpopular tax.
Inheritance Tax (IHT) is a tax on transfers of wealth, mainly levied on a person’s death. It is often criticised as complex, ineffective, riddled with anomalies, distortionary and unfair. It is a deeply unpopular tax and ripe for reform.
The current Inheritance Tax regime raises strong opinions across the political system and more widely among the general public, due to its perceived unfairness and complexity. This is even though fewer than 5% of deaths result in payment of Inheritance Tax. Of the 588,000 deaths in the 2018/19 tax year, less than 5% (24,500) of the bereaved families had to pay IHT but approximately half (275,000) were required to complete complex and lengthy IHT forms.
Due to rising asset values and the decade-long freezing of the tax-free threshold at which inheritance tax starts being paid, a growing number of estates are affected by inheritance tax. HMRC collected a record sum of £5.4 billion in IHT for 2018/19. The average amount of IHT paid was £179,000.
The Office of National Statistics (ONS) published a report in December 2019 stating that the total net wealth of private households in the UK had increased by 13% in real terms from April 2014 to March 2016, mainly due to increases in private pension wealth (now £6.098 billion) and net property wealth (now £5.090 billion). The latest figures for total net wealth of private households was recorded as £14,628 billion, but surprisingly little is known about how such wealth is transferred and when.
Half of the total aggregate wealth in Great Britain is held by 12% of households, yet total wealth and wealth-related taxes as a proportion of GDP have not increased since 1965.
It was therefore considered a good time to question whether the current IHT regime works properly and to examine some of the principles behind it. The Government itself started this process of examination in January 2018 when then Chancellor asked the Office for Tax Simplification (OTS) to review the tax. The subsequent consultation generated reports in November 2018 and July 2019 which gathered more responses than any other OTS review, demonstrating the strength of public feeling on this topic.
To offer potential solutions for reform, an All-Party Parliamentary Group (APPG) for Inheritance & Intergenerational Fairness was established in 2019. The APPG were tasked to examine whether the concerns over IHT were justified and whether there was a better way of taxing transfers of wealth. The plans for a full reform aim to “increase fairness, cut complexity and reduce avoidance”.
Having considered a number of options, many of which merit further exploration, the APPG suggests replacing the current inheritance tax regime (which combines a high flat-rate of 40% with an array of associated reliefs), with a flat-rate gift tax payable both on lifetime and death transfers. The APPG suggests a rate of 10 to 20% but recommends that policymakers should determine the appropriate rate as they have better access to the data necessary to determine the rate at which taxpayer behavior changes.
The key principle is that IHT should be low enough for the tax to be broadly based without the need for complex reliefs. A flat-rate gift tax with fewer reliefs would be simpler, more broadly based, lead to less avoidance and ensure the UK’s competitiveness in attracting wealthy people to live (and die) in the UK.
Aligned to this change, all reliefs other than spouse and charity exemptions would be abolished as would the tax-free capital gains tax (CGT) uplift on death. There would be a death allowance at a similar level to the current nil rate band (£325,000) to ensure that small estates not currently paying tax will remain unaffected by the changes. There would also be an annual gift allowance of £30,000.
The following is a summary of the key proposals:
The APPG was reasonably well represented from a cross party perspective and was also supported by leading policy organisations. It will be interesting to see if the proposals feature in the forthcoming March Budget and beyond.
If implemented the reforms could represent a fundamental change to IHT but as always, we caution against any knee-jerk reaction for the time being. Please rest assured, Clarion will be closely monitoring developments and we will of course be available to discuss the reforms and how they might affect our clients as and when appropriate.
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