Rejection of inheritance tax reform is welcome news for taxpayers - Richard Douglas-Home

There has been speculation in recent years about possible reforms to Inheritance Tax (IHT). However, in November Rishi Sunak said the UK Government had decided not to implement reforms suggested by the Office of Tax Simplification (OTS), which has put a welcome end to that speculationnote-0.
Richard Douglas-Home is a Senior Associate, Turcan ConnellRichard Douglas-Home is a Senior Associate, Turcan Connell
Richard Douglas-Home is a Senior Associate, Turcan Connell

IHT is one of the UK’s most divisive taxes, with some critics arguing that it amounts to double taxation as a taxpayer’s wealth is taxed when it is earned during their lifetime and again on death. For others, IHT is a key tool for addressing inequality, which reports suggest has increased during the course of the Coronavirus pandemic. Support for IHT is, however, often caveated by claims that the current tax regime is not as effective as it could be in achieving this goal.

Against this background, the OTS produced two reviews of IHT. The first, published in 2018, focused on simplifying administrative aspects, whilst the second (2019) proposed significant reforms. That was followed by a discussion paper published by the All-Parliamentary Party Group (APPG) for Inheritance and Intergenerational Fairness, which recommended a complete overhaul of IHT. The following are some key issues the OTS and APPG highlighted.

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Lifetime gifts: In the UK, individuals can make lifetime gifts of unlimited value with no IHT consequences so long as the individual survives for seven years. Critics say the rule benefits the wealthy as they can afford to make large lifetime gifts, which is not the case for most taxpayers. The Organisation for Economic Co-operation and Development (OECD) has expressed similar sentiments, calling the rule an “avoidance opportunity”. The APPG proposed that instead a 10 per cent charge should apply to all lifetime gifts above an annual allowance of £30,000.

Business Property Relief (BPR) and Agricultural Property Relief (APR): In its second report, the OTS recommended significant reforms to BPR that would have made it more difficult for some businesses to qualify for relief. The APPG went even further in suggesting the abolition of both BPR and APR, albeit with a lower 10 per cent rate of tax.

The Residence Nil Rate Band (RNRB): The RNRB, introduced in 2017, aimed to reduce the IHT burden on family homes. In essence, if the rules apply, a couple’s combined IHT tax free allowance (or nil rate band) can be increased to as much as £1m, whereas the normal maximum is £650,000. The RNRB has proved to be controversial and the rules themselves are complicated. The APPG recommended the RNRB should be abolished.

Some commentators have suggested adopting approaches taken by other nations with respect to their equivalents of IHT. For example, rather than a flat 40 per cent rate of tax, countries such as Italy, France and Germany have a rate that varies depending on the identity of the recipient of the gift.

Notwithstanding these criticisms, Rishi Sunak’s rejection of all the OTS and APPG proposals suggests the current IHT regime is set to remain unchanged. This will be welcome news for taxpayers and their advisors as it enables them to plan ahead with some certainty. Speculation in recent years about, for example, reforms to BPR has caused some taxpayers to worry whether they need to accelerate plans to hand businesses down to the next generation to avoid tax charges that could have a significant adverse impact on those businesses.

Richard Douglas-Home is a Senior Associate, Turcan Connell