Possible tax shake-up ahead

The All Party Parliamentary Group for Inheritance and Intergenerational Fairness (APPG) has issued a report recommending the current inheritance tax regime be abolished.

The objective is to create a lower tax regime which would require less complex reliefs.

Their report proposes a fundamental overhaul of inheritance tax (IHT), with several reliefs abolished. If implemented, the recommendations would be a significant change to the UK tax system.

The APPG has recommended the introduction of a new, less complex gift tax that would apply on lifetime gifts and on death. The nil rate band would continue to apply, but the residence extension would not. Currently, the residence extension increases the nil rate band from £325,000 up to £500,000 (ie £1 million for a married couple). This new gift tax would operate very differently to the current regime and would see many estates subject to a lower tax burden than is the case.

Another fundamental change the APPG recommends is the removal of reliefs for business and agricultural property, which would have a significant detrimental impact on succession of agricultural and farming businesses.

The rates of tax would need to be decided by policy makers and the APPG suggests gifts could be taxed

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The objective is to create a lower tax regime which would require less complex reliefs

at a flat rate of 10% and inheritances would be taxed at a rate between 10% and 20%, depending on the value of the estate passing on death.

The nil rate band amount would be available to the death estate, but would no longer apply in respect of lifetime gifts, which would be taxable when made through the annual gift exemption, which might increase from £3,000 to £30,000.

There is no need to report lifetime gifts made to individuals from an IHT viewpoint. Under this new regime it is proposed annual gifts of more than £10,000 would be reportable.

The uplift in the capital gains tax (CGT) base cost of assets given on death would also be abolished. Instead, when a gift of an asset is made, for example shares or land, that gift could be made free of CGT and when the recipient disposes of the asset, the gain would then be taxable.

Married couples with an estate of not more than £650,000 would be no worse off under these changes. If you have a more valuable estate with no IHT relievable assets you may also be no worse off and may in fact see a reduction in the inheritance tax that might otherwise be due. However, if you have an estate which is worth more than the nil rate band amounts and the assets comprised within that estate are assets that would currently attract relief from inheritance tax, ie under the business or agricultural rules, you would see an increase in IHT as a result of these changes.

Nicola Horsburgh is a tax partner with Johnston Carmichael.