A group of MPs have called on the government to re-think Inheritance Tax (IHT) by removing almost all reliefs available, including the residence nil rate band (RNRB) which was introduced in April 2017.
On 28th January 2020, the All Party Parliamentary Group (APPG) on Inheritance Tax and Intergenerational Fairness urged the government to consider an overhaul on the current system, which they claim to be “complex, ineffective, riddled with anomalies, distortionary and unfair”.
Newly-proposed Inheritance Tax Rules
The APPG recommend that the current 40% IHT should be reduced to 10%, with larger estates over £2million subject to a higher 20% rate.
The current rules relating to gifting have also been reviewed, with the APPG proposing a £30,000 annual allowance rather than the current seven-year rule. Anything over this figure would be taxed at 10%.
The report also called for more data to be collected on lifetime gifting by enforcing compulsory electronic reporting on large lifetime gifts, which would provide a “more rigorous analysis.”
Taxation of trusts would also significantly change, with gifts into trusts taxed the same as gifts to individuals. Therefore, if the donor exceeds their annual allowance of £30,000, there would be an immediate 10% tax on the excess. Under the current regime, gifts of £325,000 can be made tax-free into trusts every seven years.
How Might This Affect Business Owners or Farmers?
Businesses and agricultural property under current rules can potentially receive Business Property Relief and Agricultural Property Relief, which offer valuable inheritance tax savings. The APPG’s report offers no reliefs for businesses or farms and therefore, businesses and farms may be worse off under the proposed regime.
The current Capital Gains Tax position allows for a tax-free uplift on death, which the report suggests removing, with the gain being held over on death until the donee (the person who receives the gift) sells the asset.
Time for Change?
It is widely acknowledged that the inheritance tax rules are complicated, outdated and in need of restructuring. The proposals by the APPG offer a potentially simpler approach, however, the impact on businesses and farms may be significant. Inheritance tax is an important revenue for the government so it is unclear how many of the recommendations will be implemented, if any.
A spokesperson from the Treasury said following the APPG report, “Inheritance Tax makes an important contribution to the public finances. We keep the tax system under constant review and will consider the APPG’s findings.”