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MPs propose Inheritance Tax reform

Inheritance Tax is often viewed as the least popular tax in the UK and, ahead of next month’s Spring Budget, a cross-party group of MPs has called for a radical reform to the tax.

The All-Party Parliamentary Group on Inheritance and Intergenerational Fairness (APPG IIF) recently published a report that calls for reduction in Inheritance Tax to a flat rate of 10%, and for almost all its reliefs to be scrapped.

The report states that Inheritance Tax, "is often criticised as complex, ineffective, riddled with anomalies, distortionary and unfair" - and the group argued a simplification of 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 form 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

The APPG IIF’s proposed new system would see the Inheritance Tax rate cut to 10%, rising to a maximum of 20% on death for estates of more than £2 million.

It also puts forward a proposal for all related reliefs and allowances to be 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 receive greater powers to collect more meaningful data on gifts people give in their lifetime, via compulsory electronic reporting of anything given 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 cover probate applications.

How could 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 those 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 affected by the tax.

Of course, all of this would depend on the way any changes are implemented, and on the circumstances of each estate.

Get in touch

We can help with Inheritance Tax planning – give one of our advisers a call today on 01483 205890.

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