What Is Being Proposed?

  • The All Party Parliamentary Group on Inheritance and Intergenerational Fairness (APPG) has proposed that inheritance tax, which is currently charged at 40% on estates worth more than £325,000 (£650,000 for married couples), should be replaced by a tax of 10%, unless the estate is valued at more than £2m, in which case the tax would rise to 20%.
  • The majority of exemptions, such as Business Property Relief (BPR) and Agricultural Property Relief (APR) would be scrapped, in a bid to simplify the tax.
  • The spousal and charity exemptions would remain however.
  • The uplift for Capital Gains Tax (CGT), whereby assets are rebased on death, would also be abolished.
  • A gift tax would be brought in, with a 10% charge to tax on gifts over £30,000.
  • The current system, where gifts made within seven years of death are brought back into account for inheritance tax purposes when someone dies, would be abolished. At present there is no immediate charge to inheritance tax on gifts to individuals, whilst transfers into trust are taxed at 20% but only insofar as the transfer exceeds £325,000.

Why Is Reform Needed?

The report comes after the Office for Tax Simplification (the OTS) issued a report in July 2019 which called for inheritance tax to be simplified.

At present, fewer than 5% of estates pay inheritance tax and there is widespread dislike of the tax among the public. There is a perception that the very rich are able to avoid this tax through the use of exemptions such as BPR and APR, whilst families whose wealth is mainly tied up in their home cannot.

The Residence Nil Rate Band, the additional allowance that was introduced in 2017, allows individuals to have a higher tax free allowance when they hand on wealth in their home to their direct descendants. However, it is unnecessarily complicated and discriminates against those who do not have children or who do not own residential property.

What's Next?

It is likely that there will be a full consultation process before any reforms are implemented, so any changes probably won't take effect for some time. It will however be interesting to see whether any changes are announced in the Budget on March 11.