Earlier this year, the All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness published their recommendations for wide-ranging reforms to the current Inheritance Tax (IHT) regime. This is not the first time that IHT has come under the spotlight and follows recommendations set out by the Office for Tax Simplification (OTS) in two earlier reports, which the APPG report describes as “tinkering at the edges”. The APPG paper proposes comparatively radical reforms to a system that it describes as having been criticised as complex, ineffective, riddled with anomalies, distortionary and unfair, unpopular and ripe for reform.
Baroness Penn, when answering questions in the House of Lords in May 2020, said that she was not aware of active consideration of the changes to IHT recommended in the APPG paper. However, whilst the Chancellor continues to announce measures to help the UK’s economic recovery in the wake of Covid-19, it is clear that the costs of these measures will need to be recouped by the Treasury in due course. Changes to the existing IHT regime could be one way to do this, especially as this tax has been the subject of various publications in recent years.
The APPG’s recommendations for IHT reform
The APPG recommendations would ensure that those higher value estates that currently take advantage of existing IHT reliefs and exemptions, such as Business Property Relief (BPR) and Agricultural Property Relief (APR) face a charge to IHT. A radical reform of the current system is suggested.
The key points raised in the APPG’s recommendations include:
- Replacing IHT with a tax on all transfers of wealth, both at death and during lifetime;
- Abolishing all current IHT reliefs and exemptions (including APR and BPR), apart from the charity and spouse exemptions;
- Replacing the current nil rate band (of £325,000) with a death allowance at a similar level, which would only be available to offset against the death estate;
- Reducing the IHT rate from the relatively high rate of 40% to a rate of 10% or 20%. Research suggests that an IHT rate of over 20% provides an incentive to plan to avoid the tax;
- Increasing the annual exemption for IHT to £30,000 (but with no ability to carry forward any unused allowance);
- Removing the tax-free capital gains tax uplift on death;
- Introducing electronic reporting requirements, even on transfers that are not immediately taxable;
- Introducing a charge to IHT on all pension funds that are not passed to the spouse on death;
- Charging an annual fixed rate tax on trusts with discretionary beneficiaries and when property is appointed out of trust.
These proposals may be an especially attractive tax-raising measure in the current environment, as the government may look to target wealthier taxpayers.
Mitigating inheritance tax exposure
Taxpayers thinking of making outright lifetime gifts (Potentially Exempt Transfers or PETs for short) may wish to bring those plans forward, to ensure they can make those gifts without facing an immediate IHT charge. Non-cash gifts may result in a capital gains tax charge, so this should be considered before PETs are made, although the current economic downturn may have reduced the market value of assets previously standing at a gain.
Taxpayers may also wish to take advantage of the availability of APR, BPR and the nil rate band to transfer assets into trusts without incurring an IHT charge, although the potential changes to the IHT treatment of trusts should not be overlooked. Despite the possibility of future charges, trusts can have numerous benefits: not just in terms of tax planning, but also in respect of succession planning and asset protection.
Sally Thomas, Partner and Lucy de Greeff, Manager
For further advice on any issues raised here, please contact your usual Saffery Champness partner.