At the end of last month the All-Party Parliamentary Group for Inheritance & Intergenerational fairness (APPGIIF) published a report which recommended a complete overhaul to the inheritance tax (IHT) system. It should be noted that the APPGIIF is an informal group, and whilst is contains members from both the House of Commons and House of Lords, neither House has given it formal approval.
The report is very striking, and if implemented would see a very different way of taxing wealth which is passed between persons. Their reasoning behind the recommended changes is that the current system is unfair and complex. There is no denying that IHT in its present form is a tax which greatly divides opinion, arguably more so than any other tax, amongst both the public and politicians.
To summarise some of the recommendations:
- Abolish the 40% (and 36%) tax rate. Replace it with a 10% (and 20%) tax rate.
- Abolish the distinction of lifetime transfers between chargeable lifetime transfers (CLTs) and potentially exempt transfers (PETs).
- Abolish the nil-rate band (NRB) and residence nil-rate band (RNRB).
- Abolish all current IHT exemptions and reliefs, with the exception of spouse exemption and charity exemption.
- Introduce a £30,000 annual lifetime gift allowance. Gifts falling within the allowance would be free from tax, with any value in excess of the allowance being immediately liable to 10% tax. No ability to carry forward unused allowance to future tax years.
- Introduce a £325,000 death gift allowance. Gifts falling within the allowance would be free from tax, with any value in excess of the allowance being immediately liable to 10% tax. For estates above £2million, set the rate at 20% instead. Allow any unused death allowance to be transferred to a surviving spouse.
- Abolish the capital gains tax (CGT) base cost uplift to probate value, in relation to assets held at death. It would still be the case that no CGT would apply on the transfer from the deceased to the beneficiary, but the beneficiary would be treating as acquiring it for the same cost as the deceased did (rather than at probate value).
- Cease to use a person’s domicile as the determining factor in whether their worldwide estate is liable to tax, or just their UK estate. Instead, base it on a person’s period of residence (namely that their worldwide estate would be taxed if they have been UK resident for at least 10 of the previous 15 years).
- Abolish the relevant property regime (which exists in relation to certain trusts).
- Introduce an annual charge for discretionary trusts. Treat interest in possession trusts (regardless of when created) as forming part of the life tenant’s personal estate.
Naturally, some of these recommendations would have separate knock-on consequences. For example, by abolishing the concept of PETs and the nil-rate band, and introducing the lifetime 10% rate, it would no longer be the case that the gift with reservation of benefit (GWROB) rules would be required – rules which are often very complex and poorly understood. Similarly, the seven-year clock would cease to exist, and trusts could no longer be used in order to benefit from ‘additional’ nil-rate bands.
The APPGIIF do not bind themselves to the exact figures as stated above (eg 20% at £2million). They accept that there is room for debate and movement. Their focus is more on ensuring that a system is put in place which is better understood, and is considered to be fairer than at present.
As with the recent report by the Office of Tax Simplification (which the APPGIIF refer to in this report, generally in a favourable manner), in relation to forming (not replacing) IHT, the Government are not obliged to act on anything in this report. Therefore, at present it is simply a case of having to wait and see. Given though the wind of change which is being felt in relation to IHT, it would not be a surprise if IHT changes were to be introduced at some stage – but whether on a small scale or a large scale, we do not know.