Recommendations for significant changes to the current regime are published.
On 29th January the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness (APPG) published recommendations for radical reform of the current inheritance tax (IHT) regime. We examine the key proposals in more detail, and consider what this may mean in the context of the forthcoming budget on 11th March.
What is the APPG and what is its mandate?
The APPG is an informal group of MPs from across the political parties. It has no official parliamentary mandate; such groups are regularly formed by MPs to look closely at a certain issue of their choosing. Here, the APPG focused on understanding the issues surrounding inheritance and intergenerational fairness in the context of the current IHT regime's "perceived unfairness and complexity".
The report is particularly significant because it closely follows the Office of Tax Simplification's (OTS) two reports on the current IHT regime, published in November 2018 and July 2019, and precedes the new government's first budget on 11th March.
Key recommendations – what does the APPG suggest, and why?
In summary: a lower overall rate of IHT, with fewer reliefs, to reduce complexity.
- Cut the current rate of IHT from 40% to 10% on the first £2million and 20% on the balance
The APPG believes that rates above 20% incentivise tax planning.
- Lifetime gifting - abolish the current 7 year rule for lifetime gifts and tax all such gifts above a £30,000 annual allowance at 10% (with no nil rate band as currently); spouse exemption and charities exemption to be preserved
- On death - spouse exemption, charities exemption and nil rate band to be preserved (at somewhere around the current level of £325,000 but not on gifts into trust on death); residence nil rate band allowance to be abolished
These would be significant changes to the current IHT regime both with regard to lifetime gifts and transfers on death. By making these suggestions, the APPG aims to keep small lifetime gifts out of the IHT net and simplify the gifting regime, as well as to generally reduce the incentive for avoidance by those with higher value estates.
- Abolish agricultural property relief (APR) and business property relief (BPR)
This would have a huge impact on the IHT position of many of our clients. Whilst the OTS proposed some significant changes to these valuable reliefs (i.e. bringing the current test for a "wholly or mainly" trading business for BPR in line with that for capital gains tax (CGT) at 80% rather than 50%), the APPG goes even further and advocates scrapping them completely. Under the recommendations, IHT could be paid in interest-free instalments to save businesses having to be sold, but we can see that may not be sufficient in all cases, and could be particularly difficult with low income yielding assets.
- No CGT uplift on death, and when lifetime gifts are made the capital gain will automatically be held over until a disposal by the donee
Currently, assets are inherited with an open market value as at the date of death. Instead, the APPG proposes that the heir takes the asset with the testator's base cost for CGT purposes. The same would happen automatically with lifetime gifts (where currently hold-over relief can be claimed in certain cases). These changes are prompted by the APPG's concern (also discussed in the OTS's second report) that individuals are retaining business assets, in particular, longer than they perhaps otherwise would, to benefit from this rebasing.
- Changes for trusts – transfers into trust taxed the same as to individuals (with gifts to life interest trusts taxed as gifts to the individual life tenant), discretionary trusts to pay an annual charge
The APPG says that consideration would need to be given to IHT paid on transfers out of trusts. These proposals are significantly different to the current trust tax regime, and would presumably warrant further consultation.
The future for Inheritance Tax
The APPG asks the government to "be bold in replacing the outdated IHT regime with a more understandable alternative that reflects changes in modern society". Time will tell if, and to what extent, the government takes this request on board, but it is increasingly feeling as though the clock is ticking on the current regime, with wholesale reform perhaps ever more likely.
In the meantime, we would certainly reiterate the benefits for many clients (particularly those with agricultural or business assets) of putting their succession plan into action sooner rather than later.