Is the Reform of Inheritance Tax on the horizon?

12 February 2020

Author: Fiona Kirkpatrick
Practice Area: Private Client


On the 29th January 2020 the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness (APPG IIF) published a report on the Reform of Inheritance Tax (IHT) in the UK. IHT has long been viewed as an overly complex and unfair tax and is deeply unpopular. The report sets out some key suggestions which, if implemented, would see the most radical overhaul of the IHT regime in decades.

Currently, each individual has a “nil rate band allowance” for IHT of £325,000. This is applied to the value of an individual’s estate at death (which includes lifetime gifts known as “potentially exempt transfers” made within 7 years of death). Generally speaking, the value of the estate within this threshold is taxed at 0% with the value over and above the threshold taxed at 40%. However certain exemptions and reliefs do apply, such as spousal and charitable exemptions, and reliefs relating to business or agricultural property.

There were broadly three significant objectives behind the proposals. Firstly, to simplify what is currently a very complex and convoluted system. Secondly, to encourage the payment of tax. Fewer than 5% of deaths result in payment of IHT. Whilst in many cases this is because the estate falls below the threshold, it can also be because a wealthy individual has structured his or her affairs in such a way as to avoid the tax. Thirdly, the existing regime is perceived as out of touch with modern society, with the nil rate band and residence nil rate band allowances in particular operating in a way which discriminates against unmarried individuals and those without children. It is unsurprising therefore than many feel that a proper overhaul of IHT is long overdue.

The proposals would see the nil rate band allowance abolished and replaced by a “death allowance” at a similar level to the current allowance, but which would apply only on death, rather than to any lifetime transfers. Instead of a rate of 40%, the proposed system would see a flat rate tax of 10% on all transfers of wealth either during lifetime or on death (rising to 20% for estates valued at more than £2m), with current reliefs such as Agricultural Property Relief and Business Relief being abolished. However, it is suggested that the spousal and charitable reliefs should remain.

Whereas at present, individuals have a nil rate band allowance which effectively refreshes every seven years, the proposed report instead suggests an annual tax free personal gift allowance of £30,000. Gifts exceeding this amount would immediately be taxed at 10%.

The report also proposes significant changes to the concept of an individual’s domicile for IHT purposes, instead recommending a system based on a period of residence to determine whether foreign nationals, or those no longer resident in the UK, would be subject to UK IHT.

It is unlikely that such substantial sweeping changes would be introduced in the Government’s next budget due on the 11th March. Instead, the Government would likely want to issue a consultation with a view to changing legislation in the future. However, the report is certainly thought-provoking and practitioners will be keeping a keen eye on further developments.

Even in the absence of any major changes, it is always important for clients to seek clear and reliable advice when it comes to estate planning. Carson McDowell’s Private Client team have a wealth of experience in advising individuals and families and often work collaboratively with tax advisors and financial planners to provide clients with holistic advice regarding their personal affairs.