As we approach the Chancellor's first budget for the new Government on 11 March (correct at the time of publishing amid speculation that a new date may be announced in light of the appointment of a new Chancellor), we revisit industry discussion of the last year around the existing Inheritance Tax (IHT) system and the likelihood of imminent reform to the regime.
In July 2019, the Office of Tax Simplification (OTS) published a report on the main complexities of IHT and how these issues could be reformed (analysed in more detail here). The OTS report explored streamlining the various existing small gift IHT exemptions into one single personal gift allowance and more critically, suggested that higher trading thresholds should be introduced for the valuable Business Property Relief (BPR) to take effect. It did not, however, look at policy - i.e. whether IHT as a whole should be replaced by something else.
APPG Report
In January 2020, the All-party Parliament Group (APPG) published a report on the Reform of IHT, reviewing inheritance and intergenerational fairness, dealing with more radical proposals and bringing these issues back to the forefront of discussion.
This report made the following suggestions:
- Replace IHT with a flat rate gift tax in life and on death. Whilst the current rate of IHT stands at 40% on the taxable estate (after the nil rate band and exemptions are applied), the report proposes a reduction to 10% on the first taxable £2 million and 20% on the balance. This would reduce the scope for lifetime planning in the way that it is currently carried out, with donors free to make substantial gifts, only needing to survive for seven years before the gift falls out of the tax net completely.
- Keep the existing 100% relief on gifts to spouses and to charities (but no longer allow any reduced tax rate on the total estate on death if more than 10% is given to charity).
- Remove the nil rate band, but maintain a death allowance of £325,000 (i.e. not renewable every seven years as gifts fall out of the net, and available on the death estate only).
- Abolish the series of small lifetime gift reliefs, and replace with a single annual exemption of £30,000 (which cannot be carried forward). The proposed lifetime gift tax would then come in starting at 10% on everything beyond this which immediately presents difficulties for example where making transfers of valuable residential property. Gifts to trusts would be taxed in same way as gifts to individuals.
- Abolish the CGT uplift on death – this would create no immediate tax, but the donee instead inherits at the donor's base cost, meaning there would be no material difference between lifetime and death gifts. It does however raise the possibility of double taxation, suffering both CGT and IHT on the same economic value in an asset.
- Remove the concept of domicile as a connecting factor for IHT. This would see IHT apply to the worldwide assets of all qualifying UK residents for 10 of the last 15 years. Trusts created by individuals in this group would also no longer be protected.
- The proposal to abolish the '100% reliefs' is what would likely represent the most challenging shift for those undertaking lifetime estate planning. Making gifts and surviving for 7 years, making regular gifts from income, and owning assets qualifying for BPR and Agricultural Property Relief (APR) currently offer wide-ranging tax planning options. Losing these would have huge implications as these are key reliefs for estate planning. Allowing tax on business assets to be paid in instalments might help prevent businesses having to be dismantled to settle tax bills, but any loss of APR and BPR in particular would have wide-reaching effects.
11 March
It is possible that the Government could announce changes to take effect from the date of the budget. With eyes still on Brussels though, and in contemplating what could be the biggest shift in estate taxes for a generation, it is more likely that the Government will want to extend the consultation period before hurrying legislation through, which may mean changes are not seen until April 2021 and beyond. There is always the possibility however that anti-forestalling measures will be written in as part of the 2020 changes, as a set of interim reforms to limit tax avoidance and pre-planning. Any incoming changes will be unlikely to intentionally facilitate a fall in IHT receipts, ultimately to result in a heavier tax burden on wealthy families.
Whilst there is surrounding uncertainty, it could be prudent to accelerate any tax planning already underway before any announcements are made which begin to limit the reliefs currently used and relied upon. It is always important to keep estate planning up to date as tax laws change, and as what might prove to be a key budget approaches, this is a particularly important time to carry out that review. Individuals and families already contemplating substantial gifting should consider accelerating these plans prior to budget day.