Possible changes to inheritance tax

3 March 2020

In the midst of speculation about reforms to Entrepreneurs’ Relief, comes news of further potential changes to the UK’s capital taxes.

John Stevenson MP set up the All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness in an attempt to review reported criticisms over the ‘unfairness’ and ‘complexities’ of the current inheritance tax (IHT) regime.

The APPG’s report was published on 29 January 2020 with recommended changes not only to the rate of IHT but also to reliefs that are currently available. If implemented, those recommendations could result in profound changes to the current regime.

Current IHT regime

IHT broadly applies a rate of 40% on the value of assets in excess of a nil-rate band (currently £325,000) on certain lifetime gifts and on death.

Whilst IHT has historically been considered a tax on the wealthy, the report from the APPG contains concerns that the richest can avoid IHT through tax planning using lifetime gifts and trusts and with the utilisation of various reliefs.

As property prices have risen, and the nil-rate band has remained static for the past decade, it could be argued that the less wealthy are more exposed to IHT than ever before, although it is worth noting that fewer than 5% of deaths actually result in the payment of IHT.

The issue of increased property values was somewhat addressed with the introduction of an additional main residence nil-rate band of £175,000, available on death if certain conditions are met. The measure, which has been phased in over four years, could provide a married couple with a combined tax-free band of up to £1 million from April 2020.

In addition to the nil-rate bands, there are various reliefs and allowances available on the gifting of assets during a lifetime and on death. These include, but are not limited to:

  • IHT exemption on regular gifts out of surplus income
  • 100% relief on qualifying business property and agricultural property, and
  • Exemption on gifts to individuals if the donor survives seven years from the date of the gift.

APPG recommendations

The APPG considers that the above reliefs are most commonly used in the estate planning of wealthy individuals and that they should consequently be abolished.

Relief for business property is extremely valuable to owners looking at succession planning and is perhaps one of the reasons why the APPG suggests an option to pay the tax in ten-year instalments.  This may ease the burden on beneficiaries who may otherwise be forced to sell the business to pay the IHT, but the abolition of this relief would still likely have a significant impact.

There is also a proposal to remove the additional main residence nil-rate band of £175,000, but to maintain the nil-rate band of £325,000, so that a married couple’s combined estate is exempt only up to £650,000, instead of £1 million.

As well as some other significant changes, it has been proposed that the flat rate of IHT be reduced from 40% to 10% on estates up to £2 million, and 20% on the balance of the estate.

Various lifetime reliefs and allowances (including those listed above) would be replaced with one annual exemption allowance of £30,000.  Where that allowance is exceeded, it is suggested that a lifetime tax charge of 10% is applied to the excess immediately.

What next?

It is important to appreciate that the government is not obliged to act upon the APPG’s recommendations, and is more likely to want to consult on any major reform to IHT. It remains to be seen whether the report could influence the new Chancellor’s first budget on 11 March 2020, in which a number of tax changes are expected.

If you would like to understand your potential IHT exposure, please contact me or your local UHY tax specialist.