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

Richard Douglas-Home is Senior Partner, Turcan Connell

The IHT is one of the UK’s most controversial taxes, with some critics claiming it is double taxation, as a taxpayer’s wealth is taxed when earned while alive and again upon his death. For others, the IHT is a key tool to tackle inequality, which reports have increased during the coronavirus pandemic. Support for the IHT is, however, often questioned by claims that the current tax regime is not as effective as it could be in achieving this goal.

In this context, the OTS has produced two reviews of the IHT. The first, published in 2018, focused on simplifying administrative aspects, while the second (2019) proposed important reforms. This was followed by a discussion paper released by the Party’s Parliamentary Group (APPG) for Legacy and Intergenerational Equity, which recommended a complete overhaul of the IHT. Here are some key issues highlighted by the OTS and APPG.

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Lifetime Gifts: In the UK, individuals can give lifetime gifts of unlimited value without IHT consequences as long as the individual survives for seven years. Critics say the rule benefits the wealthy because they can afford to make large donations for life, which most taxpayers cannot. The Organization for Economic Co-operation and Development (OECD) expressed similar sentiments, calling the rule an “opportunity to avoid”. The APPG has proposed that instead a 10% charge applies to all lifetime donations above an annual allocation of £30,000.

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

The Residence Nil Rate Band (RNRB): The RNRB, introduced in 2017, aimed to reduce the IHT load on family homes. Essentially, if the rules apply, a couple’s combined IHT tax-free allowance (or zero rate bracket) can be increased to up to £1million, while the normal maximum is £650,000 . The RNRB has proven controversial and the rules themselves are complicated. The APPG recommended that the RNRB be abolished.

Some commentators have suggested adopting the approaches taken by other nations with respect to their IHT equivalents. For example, rather than a flat tax rate of 40%, countries like Italy, France and Germany have a rate that varies depending on who the recipient of the donation is.

Despite these criticisms, Rishi Sunak’s rejection of all OTS and APPG proposals suggests that the current IHT regime should remain unchanged. This will be good news for taxpayers and their advisers, as it will allow them to plan with some certainty. Speculation in recent years about, for example, BPR reforms has caused some taxpayers to wonder whether they should accelerate plans to hand over businesses to the next generation to avoid tax burdens that could have a significant negative impact on these companies.

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