Inheritance tax usually kicks in when the value of an estate exceeds the tax-free threshold of £325,000 and each year, an increasing amount of estates are having inheritance tax deducted before what’s left is distributed to any beneficiaries or causes.
Total duties raised from inheritance tax reached a new record of £5.4 billion in 2018/19, representing a 3% rise on the previous year. With the number of estates being taxed on the rise, Chancellor Sajid Javid has previously hinted that reform could be in pipeline next month.
Inheritance Tax Report Summary
An All-Party Parliamentary Group (APPG) on Inheritance Tax and Intergenerational Fairness has gone a step further. In a report published in January 2020, they claimed the current system, which has been unchanged since 2009/10, is “unpopular and ripe for reform”. The group suggested scrapping most inheritance tax reliefs and introducing a new flat rate of 10%, rising to a maximum of 20% on death for estates of more than £2 million. The group said there is evidence showing rates above 20% incentivise tax planning and by cutting rates the rules would lead to less tax avoidance.
If these proposals are implemented, then they will have a significant impact many Estates and so prompt planning could make a difference later on. At the moment, we do not know if or when these proposals will be implemented but with the up-coming Budget on 11 March 2020, there is the possibility that some or all could be introduced into legislation.
The proposals from the APPG include a flat-rate of Inheritance Tax on both lifetime giving and transfers on death at 10%; the abolition of the majority of existing reliefs and a new annual allowance of £30,000 for lifetime gifts.
Capital Gains Tax
In addition, the Capital Gains Tax tax-free uplift on death would be abolished. This means that the legatee inherits the asset at the original base cost. The tax-free uplift has been a long-held benefit of retaining assets until death and so this will have an impact on decisions around gifting of assets pregnant with gain.
There would no longer be potentially exempt gifts (PETs) which allow large gifts to become exempt from Inheritance Tax every 7 years. The nil rate band, currently £325,000, would only be available on death. Instead any gifts in excess of £30,000 in a year, would be liable to 10% Inheritance Tax.
The exemption from Inheritance Tax for making gifts to charities on death, will continue but it is proposed that the reduction in the Inheritance Tax rate to 36% will be removed (there will be no benefit if the 10% rate is approved).
The spousal exemption and the ability to transfer unused allowances on second death will remain.
Agricultural and Business Property Reliefs which have successfully allowed many Estates to pass to legatees entirely without charge, will be abolished and without the Capital Gains Tax tax-free uplift, there will be a significant tax impact for Farmers and Business owners alike. Death taxes payable on the value of the relevant property can be spread over 10 yearly instalments, as it is unlikely these types of assets will be liquidated on death.
All the small annual gift allowances will be scrapped in favour of the larger annual allowance of £30,000. This is seen to be a fairer figure, as only larger gifts would need to be reported and pay tax.
The most recent relief introduced was the Residential Nil Rate Band, which meant that married couples could exempt up to £1m of their Estate of second death. The proposal is to scrap this new relief and thereby reduce the maximum allowance down to £650,000 (£325,000 x 2).
As mentioned above, PETs and Chargeable Lifetime Transfers – where gifts into Trust are taxed at the current lifetime allowance of 20% – will disappear in favour of the annual £30,000 allowance. This means that setting up Trusts will create an immediate tax charge, with the tax being paid by the Settlor. In addition, instead of the ten-yearly charge on discretionary trusts, an annual fixed rate tax will be levied.
Trusts have fallen out of favour in modern times but have always been an effective tool for protecting wealth and managing family succession. These changes will mean that the tax cost may out-weigh the other benefit.
Domicile rules have been watered down over recent Governments and it is no surprise that the proposals support the move to restrict the benefit further. Reducing the maximum number of years of residence to 10.
Pension pots can often be left to beneficiaries in a tax-efficient manner but it is proposed that all funds left at death will be taxed at the new flat-rate of 10%.
Inheritance Tax Example
|Current position||Revised position|
|Married Couple with a £1m Estate||no IHT||10% over £650,000 but reduce via annual gifts|
|Very wealthy with business or agricultural assets||potentially little or no IHT with reliefs||significantly more tax as Estate taxed after allowances|
If these proposals are implemented, either in the Budget or future legislation, the impact could be significant. Consider reviewing your Estate and Inheritance Tax position now and start making decisions.
Lucy Orrow at Lambert Chapman will be happy to discuss your situation and help you understand your options. Please call 01376 326266.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.