ICAEW.com works better with JavaScript enabled.

Inheritance tax: is radical reform really needed?

11 February 2020: radical reforms to the inheritance tax regime are once again on the table after a cross-party group of MPs presented the fruits of a year-long investigation into ways to streamline current rules. But will this result in any meaningful change?

The All-Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness (APPG IIF) is suggesting replacing the current inheritance tax (IHT) rules – a flat-rate of 40% with an array of associated reliefs – with a 10% flat-rate gift tax payable both on lifetime and death transfers. It also suggests increasing the annual limits on gifting, unchanged since 1984, from £3,000 to £30,000.

The MPs argue that a flat-rate gift tax with fewer reliefs would be simpler, more broadly based, lead to less avoidance and ensure the UK’s competitiveness in attracting wealthy people to live (and die) in the UK.

It is estimated by the Office of National Statistics that the government brings in some £5.3bn a year from the tax. However, the current IHT regime gives rise to strong opinions across both the political system and the public due to its perceived unfairness and complexity, even though fewer than 5% of the 588,000 deaths each year in the UK result in payment of inheritance tax. Whether the changes would lead to a fall or increase in tax revenues is still to be assessed.

The combination of rising asset values and the decade-long freezing of the threshold at which IHT starts being paid means a growing number of estates are being drawn into IHT. The total net wealth of private households in the UK has increased by 13% in real terms from April 2014 to March 2016, the ONS says.

APPG IIF chairman John Stevenson MP, also a solicitor specialising in probate, said the group wanted to examine whether concerns over IHT were justified: “It has long been accepted that IHT is in need of reform. Following the government consultation on reforming the existing regime, we decided we should be a bit more radical.”

Anthony Nixon, Tax and Trust Partner at law firm Irwin Mitchell, believes a revolutionary view of IHT is needed. “For years the system has been needlessly complicated; a prime example is the introduction of the Residence Nil Rate Band (RNRB) which discriminates against those who do not own their own home, those who do not have children, and those who are not married.

“Piecemeal reform is not enough and if the APPG has recommended these huge changes after years of work, then the government should stand up and pay attention,” said Nixon.

With a new chancellor preparing for a first Budget, it is uncertain whether the government will risk a possible dent in the public finances with a radically redrawn inheritance tax, especially at a time when we are yet to see the impact of Brexit on the economy.

Mike Hodges, partner in the Private Wealth Team at Saffery Champness added: “We are yet to see whether our new Chancellor really wants to make a name as a pioneering tax reformer or will be content to tinker around the edges.”