Insights

One tax that may be the subject of a review in the 2020 Budget is inheritance tax. A cross-party group of MPs - the All-Party Parliamentary Group on Inheritance Tax & Intergenerational Fairness (APPG) - has been calling for a radical shake-up of the current rules about estate and inheritance tax and asking for IHT to be cut from 40% to 10%. They also want the rule that currently allows gifts to be made tax-free, so long as the giver lives for seven years after they make the gift, to be axed. The rationale for making these changes is that inheritance tax is unfair, that it benefits the very wealthy who are able to plan to avoid it, and is in urgent need of reform.

What are the current estate and inheritance tax planning (IHT) rules?

Currently IHT is charged at 40% on estates valued above £325,000. This is increased to £650,000 for married couples or civil partners who can combine their IHT thresholds, because an unused nil-rate band can be used by the surviving spouse.  There is also a new additional nil rate band available when the family home is inherited by direct descendants, bringing the total possible tax exemption to £1 million. In addition to this, any assets given away more than seven years before death are also exempt from IHT, provided that the giver retains no rights to, or benefits from, them.

What changes to IHT are being proposed?

The lobby group supporting change wants to cut IHT to 10% for estates above £325,000, whilst those with an estate valued at above £2 million would pay 20%. They also want the seven-year rule to be replaced with a flat rate of 10% tax on all lifetime gifts above £30,000 each year. This means that when taxpayers gift assets, they will be taxed straight away, but at a much lower rate. The main residence nil rate band has already been highly criticised for penalising those without children, because this relief is only available to people with direct descendants to leave their home to.

The reasoning behind these proposed changes to IHT are that small estates would not pay the gift tax, whilst larger estates would still be able to avoid it as donors presently can, but by making gifts within the exempted annual amount. Even so, the prospect of paying tax of a reduced rate of 10% on lifetime gifts is clearly more attractive than 40% and may mean people are less inclined to try and avoid IHT.

The Treasury has not commented on whether it intends to review IHT in the upcoming Budget. One of its spokesmen said, “IHT makes an important contribution to the public finances. We keep the tax system under constant review and will consider the APPG’s findings.”

If you wish to discuss your estate and inheritance tax planning, please contact us at partners@rjp.co.uk. Note, RJP LLP is also licensed by the ICAEW to apply for Grant of Probate.