Inheritance tax in ‘dire want’ of reform

Simon Hodges, director of coverage at STEP (the Society of Belief and Property Practitioners), questions whether or not the present guidelines surrounding Inheritance Tax (IHT) are match for goal.

The present Inheritance Tax system (IHT) is just too advanced, ineffective and unfair. With excessive property costs and a 0 price band that has been frozen since 2009 (and prolonged to 2028), extra individuals will fall into the IHT internet within the years to return.  

STEP, together with others, has been calling for reforms to the inheritance tax system for a number of years now. A low-rate inheritance tax with few reliefs and exemptions would enormously simplify the system and enhance equity for households. 

These reforms had been thought of within the All-Get together Parliamentary Group (APPG) for Inheritance and Intergenerational Equity report again in 2020. The report referred to as for the introduction of a ‘flat-rate reward tax’. The premise was that it will exchange the present IHT system’s multitude of reliefs and exemptions. The proposals would tax lifetime and loss of life transfers of wealth, with only a few reliefs and a low flat price of 10 per cent, which is significantly decrease than the 40 per cent levied at current.

Charges would attain a most of 20% solely on loss of life estates of over £2m. Proof gathered within the report means that charges above 20% begin to incentivise tax planning. By reducing charges, the proposal would result in much less avoidance, whereas maintaining the UK enticing for wealthier people.

Our personal analysis amongst 500 of our members, together with solicitors, tax advisors, Monetary Planners and accountants confirmed that almost all (65%) agreed with this suggestion, and imagine a ten% flat price is one of the simplest ways to simplify the system and discourage avoidance by wealthier households.

The truth is, an IHT overhaul is extra widespread as a income raiser (36%) than both a one-off wealth tax (29%) or an annual wealth tax (13%) amongst business professionals who advise households on inheritance planning.

Related arguments had been thought of in a paper written final 12 months by Tim Pitt, the previous advisor to each Sajid Javid and Philip Hammond. The paper, Highway to Credibility, was written for the thinktank Onward and proposed abolishing inheritance tax and changing it with a lifetime reward allowance as a fairer approach of taxing inheritances. It additionally steered that the huge system of reliefs must be reformed.

The tax system wants remedying.

Our members are practitioners who know higher than anybody the complexity of inheritance tax and there’s sturdy help from them for the federal government to revisit the APPG proposals. There may be additionally prone to be help from the general public, with inheritance tax named essentially the most hated tax by respondents to a survey by Hargreaves Lansdown in 2021.

Whereas there have been studies that the Treasury was engaged on numerous choices for reducing or abolishing some tax reliefs within the UK for the Chancellor to think about, the 2023 Spring Price range didn’t ship main change on this regard.

Whereas it didn’t handle the larger points, the Price range did convey some welcome simplification to the prevailing system. The Chancellor revealed that earnings tax concession for low earnings trusts and estates can be formalised and prolonged, making calculation and reporting extra easy.

HMRC additionally intends to take away non-taxpaying trusts from IHT reporting necessities. STEP has been calling for such modifications and welcomes these strikes. Nevertheless, with out vital reform of IHT, it’s going to proceed to justify its tag as essentially the most hated tax of all.  

Simon Hodges is director of coverage at STEP. He has over 15 years of coverage expertise gained at establishments, together with HSBC, Citigate Dewe Rogerson and on the Treasury, the place he began his profession. His decade on the division noticed him carry out roles, amongst others, within the Price range workforce and the Ministerial workforce, together with as head of the particular advisers workplace.