At the end of January, the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness (APPG) produced its report with major recommendations to reform inheritance tax. These changes would represent a radical and comprehensive rewrite of the existing regime.
The APPG had already provided interim recommendations to the Office of Tax Simplification (OTS) in May 2019. The aim of the report released in January 2020 was to "review the more radical options that were presented" to the OTS. The two themes that the APPG based its work on were the complexity of the regime as it currently stands and the perception that the rich can avoid inheritance tax more easily than others.
The APPG report has come up with several recommendations, including:
- a flat rate gift tax payable both on lifetime and death transfers;
- the abolition of the seven-year gifting regime and associated taper relief;
- scrapping all reliefs other than the spouse and charity exemptions; and
- ending the capital gains tax uplift on death.
The flat rate suggested in the report is a 10% tax on the worldwide estate up to and including a value of £2 million, with a rate of 20% on any amounts above this. However the report does recognise that this will be for government and parliament to consider.
The abolition of most reliefs, including business property relief and agricultural property relief, would be balanced by an annual allowance of £30,000 on gifts made during a person's lifetime. However, the existing £325k nil-rate band would remain available for transfers on death in order to ensure that small estates which currently escape inheritance tax will remain unaffected by the changes.
The first point to note is that this report does not represent current government policy. We do not know whether any of these proposals will be accepted by the government, either in the upcoming or any future budget. It is hoped that drastic changes along the lines put forward by the APPG would be subject to extensive industry consultation before any new legislation is introduced.
What can be said with some certainty is that inheritance tax has come under increasing scrutiny in the past couple of years. Inheritance tax on both lifetime and death transfers is complex and confusing, the tax is widely perceived as unfair and it has been described by the press as "Britain's most hated tax". Reports commissioned by the Labour Party and by think tanks such as the IPPR have been published recommending an overhaul of the system, and there is an ongoing consultation being undertaken by the OTS. All the indications are that the present inheritance tax regime will undergo some modification – the question is only how radical any changes will be.
Given the uncertainty it is not clear whether, or to what extent, inheritance tax mitigation will be possible under any future taxing framework. Undertaking some tax planning now may therefore be opportune while we still have a familiar regime where both the opportunities and pitfalls are known.