Could inheritance tax be reformed In the Budget?
If any one mainstream tax is likely to see major changes in this year’s Spring Budget, inheritance tax appears to be the most obvious candidate.
It’s generally regarded as unpopular and convoluted, with many people disagreeing in principle with the very idea that money and possessions that they’ve paid tax on during their lifetime will be taxed a second time after they die.
Ex-Chancellor Sajid Javid seemed to pick up on that point in October 2019, when he commented at a Conservative Party conference event that the tax was “on his mind”.
“People pay taxes already through work or investments, capital gains and other taxes,” he said. “There’s a real issue with then asking them to pay taxes all over again.”
But following Javid’s sudden resignation on 14 February 2020, it remains to be seen whether the same view is shared by his successor, Chancellor Rishi Sunak.
If changes are in store, those are likely to be announced when Sunak delivers his first Budget speech on 11 March 2020.
For now, the main clues as to which aspects of inheritance tax might change can be found in the reports that independent groups have put forward for the Government’s consideration.
Over the last few years, the inheritance tax system has been reviewed by the Office of Tax Simplification (OTS), and more recently by the all-party parliamentary group on inheritance and intergenerational fairness.
Digital system and lifetime gifts
The OTS’s first report, published in November 2018, focused on the current administration of the tax, and looked at ways of cutting down on the paperwork families are required to fill out, especially for smaller estates with no tax to pay.
It proposed setting up a “fully-integrated digital system”, which would include the ability to submit a probate application.
The second report, which was released in July 2019, reviewed the inheritance tax system itself. Its recommendations included replacing the system for lifetime gifts – gifts given during a person’s lifetime which may still be liable for inheritance tax – with a single personal gift allowance.
It also suggested shortening to 5 years the 7-year period in which some gifts can be liable, and removing the current taper system which sees inheritance tax applied at different rates depending on when a gift is given.
Radical overhaul
In a report on 29 January 2020, the all-party parliamentary group on inheritance and intergenerational fairness called on the Government to replace the inheritance system altogether.
While the report said there were “merits to many of the OTS recommendations”, it argued that inheritance tax would be too difficult to simplify without “radical reform”.
Its recommendations included cutting the tax from its current rate of 40% to a flat rate of 10%, but removing almost all of the reliefs associated with it.
Under this system, exemptions such as the residence nil-rate band, special rules for agricultural and business property, and the various reliefs for lifetime gifts would be abolished.
Instead, it would allow exemptions for spouses and charities, one annual gift allowance of £30,000, and a ‘death allowance’ at a similar level to the current nil-rate band, which stands at £325,000.
Echoing the OTS’s calls for a digital inheritance tax system, the group also suggested implementing compulsory electronic reporting of lifetime gifts.
TC Group’s Director of Financial Planning, Simon Perkins, commented “As we approach the end of another tax year on 5 April 2020, it is a good time to make sure that your finances and tax position are structured as efficiently as possible. There may be steps which can be taken now to minimise your tax liability or optimise choices for the future. We are always delighted to help and recommend the most appropriate action for clients.”
Whatever is announced in the Spring Budget this year, TC Group’s financial planning service will help you plan for any changes, and protect your family estate.
To find out more, contact your local office on 0330 088 7111.