Inheritance Tax reform is long overdue, yet politically, there’s little appetite for reforming the Exchequer’s cash cow.
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Inheritance Tax reform
Inheritance Tax (IHT) is widely considered complex, ineffective, and unjust. And with high property prices and a nil rate band (£325,000) frozen since 2009 – and now extended to 2028 – increasingly more people are caught in the IHT net. Frankly, it’s unsurprising that a public survey by Hargreaves Lansdown revealed IHT as the most hated tax among respondents.
For many years, the Society of Trust and Estate Practitioners (STEP) has called for reform to the IHT system. Specifically, they suggest that a low tax rate with few exemptions and reliefs would result in greater simplicity and fairness for families.
All-Party Parliamentary Group
In January 2020, the All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness produced its report. Recommending major reform to IHT, their proposals included:
- introducing a flat rate ‘gift tax’ payable both on lifetime and death transfers;
- abolishing the seven-year gifting regime with its associated taper relief;
- scrapping all tax reliefs other than the spousal and charity exemptions; and
- ending Capital Gains Tax (CGT) uplift on death.
The APPG’s recommended flat rate was a 10% tax on a person’s worldwide estate up to a value of £2 million. Above this threshold, the rate would be 20%.
Among the tax reliefs abolished if the government implemented these recommendations would be business and agricultural property reliefs. However, it’s argued that would be balanced by an annual allowance of £30,000 on lifetime gifts. But the existing nil rate band of £325,000 would remain available for transfers on death, ensuring that small estates currently exempt from IHT would remain unaffected.
Less tax avoidance
Evidence considered by the APPG suggests that rates above 20 per cent incentivise tax planning. So, by cutting rates, there would be less avoidance while maintaining the UK’s attractiveness for wealthy individuals.
A survey of 500 STEP members revealed that almost two-thirds agreed with the APPG’s recommendations.
In a paper published last year by the Conservative think tank, Onward, Tim Pitt, a former adviser to two Chancellors of the Exchequer, also proposed the abolition of IHT. In its place, he recommended a lifetime gift allowance as a fairer way to tax inheritances. But he agrees with the APPG regarding reforming the bewildering array of exemptions and reliefs.
Although the 2023 Spring Budget simplified the existing IHT system to a very limited degree, there is currently no government enthusiasm for significant change.
Perhaps that’s not surprising, with data from HMRC revealing that IHT receipts in January 2023 were 18% higher than in the same period in 2022. Current annual receipts are around £5.9 billion – £900 million higher than last year. Understandably, the Chancellor has no appetite to reform this cash cow in the current economic climate.
And should Labour win the next general election, their current plans for IHT involve raising more tax by increasing rates and tinkering with existing reliefs – ie no wholesale reform.
In short, IHT seems set to continue in much the same form for the foreseeable future.