Graham Bevan, senior trusts and estates manager at DSG, discusses APPG’s recently proposed changes to Inheritance Tax, weighing up the pros and cons for the business world.
On 29th January, the All-Party Parliamentary Group (APPG) released a report calling for a reform on the currently ‘unpopular’ Inheritance Tax (IHT). The seemingly radical proposal suggests charges should be cut from 40 per cent on estates above £325,000, or £650,000 for married couples or civil partner, to 10 per cent. It also cites that those above £2m would pay 20 per cent.
The proposed changes would see the current IHT regime abolished and replaced with an entirely different one, including modifications to the current gift tax charges with a drop to 10 per cent tax on lifetime gifts over an annual allowance of £30,000. APPG is also calling for the removal of the seven-year rule (whereby if you survive for seven years, the gift falls out of account) and the removal Capital Gains Tax uplift on death, meaning beneficiaries would receive inherited assets at their original purchase value.
There is no doubt that the current system is widely considered complex and bias, with many believing existing reliefs essentially allow the super wealthy to avoid paying IHT altogether. Therefore, there is a definite requirement to modernise the regime but, as with all radical reforms, there are a number of pros and cons to consider.
IHT is a very emotive topic, with many citing an imbalance in the current system over a number of years now. This is especially pertinent for those who have worked hard to accumulate wealth and still require the assets they have – whether that be a house or savings – compared to individuals with more wealth but who are able to take advantage of the reliefs available and therefore pay little or no IHT.
The proposals from APPG would give the deal more simplicity which is required, but it could also lead to some people losing out. A broader based tax would be seen as a better fairer option, especially for small family run businesses as opposed to larger organisations. The abolition of the main reliefs is potentially controversial as, in essence, they were originally established to support businesses and ensure they continued from generation to generation, rather than them being used for purely planning purposes. Complications may also arise when determining original values of assets transferred to beneficiaries, as well as a potential element of additional red tape in the reporting requirement.
On top of this, we need to consider the impact of external factors, such as house prices – as the value of homes go up, IHT will follow, and the impact on AIM securities. There is also the rise of co-habiting, which has many conflicted when it comes to spousal exemption. The way we policy these mitigating factors needs updating, whether that means the state supporting marriage or establishing a rule for long-term living arrangements.
So, what will happen next? In theory, these changes could be brought in from Budget day on 11th March. However, with such sweeping reforms, there may be further consultation. Whether some steps are taken in the budget in order to get the ball rolling rather than a total reform is also a possibility. We must also remember that these changes have been suggested periodically for a number of years now, none of which have ever come to fruition.
Ultimately, if such a bold and radical overhaul of the system comes into play, there will be winners and losers across the board. However, the intention here is to spread the burden and minimise impact, so it could be seen a step in the right direction. A lot of the proposals put forward by APPG have considerable merit – it will be interesting to see what happens come Budget day.
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