There has been a great deal of speculation in relation to potential tax measures that could be announced at the UK Autumn Statement on 17 November. It has been reported that that the Treasury has been working on a range of options for cutting or abolishing some tax reliefs in the UK for the Chancellor, Jeremy Hunt, to consider.
Tim Pitt, a former advisor to both Sajid Javid and Philip Hammond, has written an interesting paper for the thinktank Onward. The Road to Credibility proposes abolishing inheritance tax and replacing it with a lifetime gift allowance as a fairer way of taxing inheritances. It also suggests that the vast system of reliefs should be reformed.
‘Reform of inheritance tax’ report
STEP has been calling for reforms to the inheritance tax system for several years. These reforms were considered by the All-Party Parliamentary Group (APPG) for Inheritance & Intergenerational Fairness in a report in 2020. The report, produced with the input of leading think tanks and tax organisations, calls for the introduction of a ‘flat-rate gift tax’, which would replace the current IHT system’s multitude of reliefs and exemptions.
The proposals would tax lifetime and death transfers of wealth, with very few reliefs and a low flat rate of 10 per cent, which is considerably lower than the 40 per cent levied at present.
Rates would reach a maximum of 20 per cent only on death estates of over GBP2 million. Evidence gathered in the report suggests that rates above 20 per cent start to incentivise tax planning. By cutting rates, the proposal would lead to less avoidance, while keeping the UK attractive for wealthier individuals.
STEP’s inheritance tax survey results
STEP undertook a survey in 2021 that found 65 per cent of inheritance advisors agree with the APPG recommendation of a 10 per cent flat rate as the best way to simplify the inheritance tax system and discourage avoidance by wealthier families.
Just under half (45.8 per cent) of respondents agreed that GBP2 million is an appropriate threshold for estates to pay the higher rate, while 28 per cent think it should be higher and 7.6 per cent think it should be lower. Overhauling IHT is also more popular as a revenue raiser than either a one-off wealth tax or an annual wealth tax. Around a third (36 per cent) of respondents favoured inheritance tax, while the other options are preferred by 29 per cent and 13 per cent respectively.
Ahead of the Autumn Statement we would urge the government to revisit the APPG report proposals. The report and our survey shows there is strong support by practitioners who know better than anyone the complexity of inheritance tax.
We would like the Chancellor to adopt the new system recommended by the APPG to remedy a complex tax system. A broadly based low-rate tax with few reliefs and exemptions is far preferable than a tax with a high headline rate that the well advised can avoid by use of complex reliefs and exemptions. The flat rate proposed by the APPG would apply across the board and lead to less avoidance. Currently large amounts of wealth can be passed on free of tax by lifetime gifts.
There is media discussion that the Chancellor may continue to freeze the inheritance threshold until 2028. This would be disappointing, since the threshold hasn’t increased since 2009. It might indicate that the government does not intend to reform the inheritance tax system before then. There has also been speculation about potential changes to capital gains taxes and savings tax reliefs. However, we continue to urge the government to use this opportunity to reform inheritance tax and make positive changes to the existing, convoluted system.
Emily Deane TEP, Technical Counsel & Head of Government Affairs at STEP