A cross-party group of UK politicians has proposed replacing the current inheritance tax (IHT) regime with a flat-rate gift tax payable both on lifetime and death transfers.
The All-Party Parliamentary Group (APPG) for Inheritance & Intergenerational Fairness was established to come up with reform solutions for a tax often criticised as “complex, ineffective, riddled with anomalies, distortionary and unfair”.
It has suggested a tax rate of 10%.
This compares with the current flat-rate of 40%, which comes with an array of associated reliefs on anything above £325,000 ($422,804, €384,430).
But the report said policymakers should make the decision because “they have better access to the data necessary to determine the rate at which taxpayer behaviour changes”.
The APPG said it needs to be low enough for the tax to be “broadly based without the need for complex reliefs”.
Complete overhaul
Rachael Griffin, tax and financial planning expert at Quilter, said: “Inheritance tax has had layer after layer of complexity added on top of it since its inception and, as we have heralded a new decade, it seems an area where reform, or at least simplification, is long overdue.
“The APPG suggests a complete overhaul of inheritance tax and it’s easy to see why.
“As with most complicated things, it’s easier to just scrap the whole thing and start again.
“Their proposal has the magical ingredient needed by most successful proposals – simplicity. It is easy to follow, and people do not need a law degree to navigate secret clauses.”
Attractive proposition
The report said that a flat-rate gift tax with fewer reliefs “would be simpler, more broadly based, lead to less avoidance” and will help ensure the UK attracts wealthy people to live (and die) in the country.
Aligned to the main change, all reliefs other than spouse and charity exemptions would be abolished and the tax-free CGT uplift on death would be abolished.
There would be a death allowance at a similar level to the current nil rate band to ensure that small estates not currently paying tax will remain unaffected by the changes.
Also, there would also be an annual lifetime allowance of £30,000 on lifetime gifts.
Unaffected
“The APPG anticipate the reforms would mean most households would remain unaffected by the change and smaller estates would pay nothing,” said Griffin.
“However, simplicity will also lead some people to lose out. Among other things people will need to think carefully about their lifetime gifting.”
Griffin said that the annual lifetime allowance of £30,000 on lifetime gifts would not win the government many favours.
This is because taxing the flow of wealth being passed down will hurt today’s generation, who are the first to be worse off than their parents.
Greater authority powers
The APPG has also recommended that HM Revenue and Customs (HMRC) and HM Treasury are given greater powers to collect more meaningful data.
This will be done through compulsory electronic reporting of lifetime gifts over the current annual exemption of £3,000, even if they are not immediately taxed.
Most cash lifetime gifts do not need to be declared if the donor survives seven years, so HMRC gathers a “limited” array of information.
Gift limit
The APPG said: “It has been suggested that all lifetime gifts over a de minimis limit (say, £10,000) should be reported, even if they fall within the lifetime allowance.
“This should eliminate reporting and tax on small everyday gifts to dependents and relatives and, in fact, would be a more useful and less onerous reporting regime.”
Under the proposed IHT regime, lifetime gifts would not affect the tax payable on death and the higher annual allowance would take most smaller gifts out of reporting and tax.
But, as larger lifetime gifts over £30,000 per annum would be taxable and reportable immediately, “the government would collect better data”.
Griffin added: “While the driver is understandable, to collect better data to review, it seems like just another thing for the taxpayer to keep track of and declare year after year.
“And the value of such an endeavor must be strongly considered.”
Wary of repeating same mistake
“We also must remember that the current IHT system was originally straightforward and, in many ways, still is,” Griffin said.
“What has added complexity over the years is the allowances that have been tacked on to it because it became a political plaything to win the favour of voters.
“If we were to throw the baby out with the bath water and launch an entirely new IHT system, we must be wary the same thing does not happen again.”
