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Trusts and estates

The All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPG) has published a report recommending the abolition of inheritance tax (IHT) in its current form and replacing it with an entirely different regime.

The proposal has arisen through the somewhat frustrating and complex array of IHT provisions and possible exemptions that currently stand, which some have claimed result in unfair outcomes.

The APPG ultimately proposes that lifetime and death transfers of wealth will be taxed at a low flat rate of 10%, compared with the 40% on present on estates valued above the nil-rate band of £325,000 (NRB).

For estates above £2 million, the IHT rate would rise to a maximum of 20%. The idea is that by cutting rates, the proposal would lead to less avoidance and a fairer outcome.

The NRB would be replaced by a ‘death allowance,’ set at a similar level to the current NRB of £325,000, available only on death, irrespective of previous lifetime giving.

Whilst this seems positive in the first instance, the report also recommends abolishing most of the current reliefs, including:

  • Agricultural and Business Property Relief (APR & BPR)
  • The seven year rule for Potentially Exempt Transfers (PETs)
  • The Capital Gains Tax uplift on death.

Instead of PETs which allow large amounts of wealth to be passed on tax-free by lifetime gifts, if the donor survives for seven years; the APPG report proposes to introduce gifts of £30,000 each year, completely tax-free, and gifts above that threshold would be taxed at 10% immediately. No further tax would be payable at death on those gifts, giving families incentive to gift and certainty in planning.

However, this also means that the taxation of trusts would thereby also be ‘simplified’ and the ability to give away £325,000 tax free every seven years to trusts would be removed.

The proposals, if implemented, will largely simplify the inheritance tax process. However, in the same respect, could begin to cause real problems for large business and/or landowners. The abolition for some of the most important tax reliefs – APR & BPR, could cost individuals and estates a large amount in tax payable, despite the reductions from 40% to 10/20%. Estate and succession planning to utilise these reliefs is therefore crucial before any such changes are confirmed.

Ultimately, the real debate for the IHT reform proposal stems from the key words ‘if implemented’. Inheritance Tax contributes a huge amount to public finances, so any such reform will inevitably result in a loss to public funding – which we are convinced is not something the government will be so willing to sacrifice!

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