As published on internationalinvestment.net, Wednesday January 29, 2020.
A cross-party group of MPs has recommended radical changes to inheritance tax, with proposals to cut the current "unfair" rate of 40% down to 10% for estates caught by IHT.
The All-Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness has called on the UK government to consult on serious reforms to the death duty in a bid to stamp out avoidance from the ultra-wealthy - and ease the burden on the growing number of middle-class families being caught in the tax net.
In its report, it also suggested removing tax-free allowances on family homes passed down to children. The current seven-year rule, which allows gifts made seven years before death to be tax-free would also be scrapped.
The group are also calling for the rate to stand at 20% for estates worth more than £2m.
John Stevenson MP, chairman of the APPG, said it was clear the tax raised "strong opinions across the political spectrum" but warned the current way the tax was levied and its reliefs led to a "strong sense of injustice".
He added: "The rich get away with not paying and IHT is perceived as an unfair penalty on hard working savers.
"Our bold proposals for reform seek to address this unfairness by simplifying the system and ensuring that the higher value estates that currently take advantage of so many reliefs and exemptions actually pay some IHT."
The standard Inheritance Tax rate is currently 40%, and this is only charged on the part of the estate that is above the threshold. Currently the threshold is £325,000 - although it may be possible for a person to increase their threshold.
The report follows a previous investigation into Inheritance tax (IHT) commissioned by the Treasury and conducted by the Office of Tax Simplification. The OTS urged substantial changes, but this latest report — which was not requested by the government — goes even further, arguing root and branch reform is needed.
Rachael Griffin, tax and financial planning expert at Quilter, said: "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."
Paul Falvey, tax partner at accountancy and business advisory firm BDO, said: "Following two reports from the Office of Tax Simplification (OTS) on proposed changes to the Inheritance Tax (IHT) system, it is perhaps unsurprising that reform is looking increasingly likely.
James Ward, head of the Private Client team at law firm Kingsley Napley LLP, commented: "There would be very little objection from the wealthy middle classes if such a proposed cut in Inheritance tax was implemented and tax generally simplified. The rise in property prices alone have seen so many estates pay inheritance tax at a very punitive 40% rate. However a reduction to say 10% or 20% does pose some questions.
"Would a Conservative Government propose such a tax cut when the coffers need filling and the main reason they are in power with such a majority is the Northern working classes? Many of these "new blue voters" will never have an issue with inheritance tax under the current regime, where a married couple can leave £1m from this April to their children if they own a home valued over £350,000. A change, as proposed, may not be well received by them since it clearly favours families in the south."
"Nothing is quite that simple when it comes to headline grabbing tax cuts. However, even if these proposals are not followed, I would expect to see the simplification of inheritance tax in some way on March 11th or a future budget, potentially following some of the recommendations of the Office of Tax Simplification last year."
While only 5% of UK estates are liable for IHT, the rising price of houses, particularly in southern England, means that more families are becoming liable for the tax. There are many exemptions, however, which create confusion for those tasked with managing their relatives' estates.