In the latest proposed change to what’s often seen as the least popular tax in the UK, a cross-party group of MPs has called for radical reform to inheritance tax ahead of next month’s Spring Budget, currently scheduled to take place on 11 March 2020.
The all-party parliamentary group on inheritance and intergenerational fairness published a report on 29 January, calling for inheritance tax to be reduced to a new flat rate of 10%, and for almost all its reliefs to be scrapped.
This may come as good news to those who oppose the tax in principle – as the report says, “it is often criticised as complex, ineffective, riddled with anomalies, distortionary and unfair” – and the group argued that simplifying the system would result in lower levels of tax avoidance.
However, for those who have already carefully planned how they’re going to distribute their estate to their loved ones, any major reform could require a rethink.
Whatever changes are announced by the new Chancellor Rishi Sunak in the Spring Budget, some kind of inheritance tax reform is looking increasingly likely.
The current system
At the moment, inheritance tax is charged at 40% on estates worth more than £325,000, but there are multiple reliefs and allowances available. These include exemptions for someone passing an estate on to their spouse or to charity, giving a family home to direct descendants, passing on farms and businesses, and giving certain types of gifts during their lifetime.
The proposed new system
Under the new system suggested by the parliamentary group, the inheritance tax rate would be cut to 10%, rising to a maximum of 20% on death for estates of more than £2 million. However, all the related reliefs and allowances removed, apart from:
- Spouse and charity exemptions
- An annual gifts allowance of £30,000, increased from the current annual exemption of £3,000
- A ‘death allowance’, which would be kept at a similar level to the current nil-rate band (£325,000)
The report also recommended that HMRC and the Treasury should be given greater powers to collect more meaningful data on gifts people give in their lifetime, through compulsory electronic reporting of anything given that’s over the £3,000 annual exemption.
This is in line with a previous recommendation by the Office for Tax Simplification, to implement a “fully integrated digital system for inheritance tax”, which would also include probate applications.
How would this affect you?
The obvious benefit of the proposed new system is the reduction of the inheritance tax rate, meaning estates that would previously have paid 40% tax on any amount exceeding £325,000 would instead be paying only a quarter of that.
For most people, a simpler system would also mean a better understanding of how death duties work, lower legal costs, and less stress for friends and relatives dealing with the estate of someone who has died.
However, some may be affected by the loss of all the reliefs associated with inheritance tax.
For example, the residence-nil rate band that currently adds an additional allowance for passing on a family home to direct descendants would no longer be in effect – and with property values making up a significant portion of many estates, that might mean more people are brought into paying the tax.
Of course, all of this would depend on the way any changes are implemented, and on the circumstances of each estate.
Talk to us about inheritance tax planning.