The All-Party Parliamentary Group on Inheritance and Intergenerational Fairness (“APPG”) recently released a report setting out proposals for substantial reform of the current inheritance tax (“IHT”) regime. This follows on from their initial recommendation paper in May 2019 and the Office of Tax Simplification’s (OTS) report into inheritance tax.
Under the current tax system, transfers on death are charged to IHT at a rate of 40%, with various allowances, exemptions and reliefs available to help mitigate the potential tax charge. The tax charge on lifetime gifts made to individuals is delayed until the donor’s death or avoided altogether if the donor survives 7 years from making the gift.
APPG advises that the current tax regime is ‘often criticised as complex, ineffective, riddled with anomalies, distortionary and unfair’. In an effort to simplify the calculation and payment of tax, they recommend abolishing the differentiation between transfers of wealth made during someone’s lifetime and those made on their death by introducing a new IHT flat rate of 10% on all transfers.
Under the new proposed regime, all lifetime gifts would be immediately charged IHT when made, rather than delaying the tax charge until the donor’s death. This would scrap the current rule which allows gifts to be made tax-free so long as the donor survives 7 years from making the gift. APPG recommends allowing gifts to spouses, civil partners and charities to remain exempt but all other reliefs, including BPR and APR, would be abolished. Instead, the annual gifting allowance, currently £3,000, would be increased to £30,000. The value of gifts exceeding this would be charged IHT at a rate of 10%.
For transfers on death, the APPG recommends abolishing the nil rate band and residence nil rate allowances and introducing a new single death allowance similar to the nil rate band limit (currently £325,000). This new allowance would be transferable between spouses and civil partners. The value of estate over and above the death allowance would be charged IHT at 10%. For estates exceeding £2 million, the IHT charge would increase to 20%. Additionally, there would be no Capital Gains Tax (CGT) uplift on death. Instead, transfers on death would be made on a no gain/no loss basis and the CGT charge would be delayed until the asset is subsequently sold by the donee.
Lastly, the APPG recommends introducing compulsory electronic reporting on all lifetime gifts over a certain limit to allow more accurate data on gifting to be recorded.
These recommendations, if implemented, will radically change the current inheritance tax system and it is hoped by the APPG that in doing so, a more simplified and fairer system will emerge which will result in less avoidance.