17 February 2020

Reform of IHT - All-Party Parliamentary Group proposal paper

The snappily titled All-Party Parliamentary Group for Inheritance and Intergenerational Fairness (APPG) has published a paper proposing a complete overhaul of the existing UK inheritance tax (IHT) rules.

The APPG is essentially a discussion forum, set up to address concerns relating to the complexity, and perceived unfairness of the current system. Such concerns were highlighted recently by the number and strength of feeling of responses to a review of IHT made in 2018 by the Office of Tax Simplification (OTS) which, the paper indicates, received more responses than any other OTS review.

Given the APPG's remit, it is important to be aware that the proposals made in its paper should not be regarded as current UK Government policy, nor even necessarily as likely future policy. Nonetheless, those contributing to the paper included senior representatives from the major professional bodies in the UK in the area of trusts and estates and, as such, it is quite possible that some or all of their ideas may be picked up by the current or a future administration.

Summary of the principal proposals

The paper is radical in its proposals, the most significant of which are as follows:


  • To replace the current IHT regime with a tax on lifetime and death transfers of wealth, with very few reliefs and a low flat rate of tax. The paper suggests a rate between 10% and 20% (potentially, on death, the higher rate might apply to estates over £2 million). This would replace the existing rate of 20% on lifetime taxable transfers and 40% on death. The reference to "very few reliefs" effectively means that business property relief (BPR) and agricultural relief (APR) would be abolished. The spouse and charitable exemptions would remain.
  • All transfers of wealth, in excess of an annual gift allowance, would be taxable. It would no longer be possible to make potentially exempt transfers (PETs), whereby a lifetime gift of any value may be made free of IHT provided the donor survives for 7 years following the gift (and the rate of IHT reduces progressively in the period between 3 and 7 years after the gift).
  • An annual gift allowance, suggested to be £30,000, should replace all existing allowances. This allowance would not be capable of being carried forward to a later tax year, as is possible with the existing £3,000 annual exemption.
  • In the case of lifetime gifts of cash, the donor would withhold 10% of the gift to pay the tax. For gifts of an illiquid asset, there would be an option to pay any tax in interest-bearing instalments over 10 years. For farms and businesses, instalments could be paid over the same period, but on an interest-free basis. This is intended to go some way towards mitigating the proposed loss of APR and BPR.
  • The tax-free uplift on death for capital gains tax (CGT) purposes should be abolished. Instead, rather than assets passing to heirs at their market value on the date of death, they would pass on a no-gain, no-loss basis. The recipient would take the assets subject to any gain in value since the deceased acquired them, but any tax charge would be held over until the recipient disposed of them in the future. Hold over would also be available on the same basis for lifetime gifts of assets.
  • The IHT nil rate band (NRB) in its present form should be replaced with a "death allowance", which the paper suggests could also be set at the existing NRB value of £325,000, or a similar value. The paper assumes that this would continue to be transferable between spouses as it is now. The residential nil rate band would be abolished. This is generally regarded as excessively complex in its terms, and is relevant only to residential properties passing to direct descendants.
  • Anti-avoidance rules, such as those applying to gifts where the donor retains a benefit in the gifted assets, would no longer be necessary as all gifts would be taxed. Such rules could be abolished, significantly simplifying the IHT legislation.


  • Gifts into trusts, whether life interest or discretionary in nature, should be taxed in the same way as gifts to individuals, i.e. at 10% (or 20% as applicable) once the donor had exceeded his or her annual £30,000 allowance.
  • Discretionary trusts would pay an annual charge based on the value of the trust fund.
  • In the case of interest in possession trusts, there would be a further tax charge on the life tenant's death, as there would on the death of an individual in respect of his or her estate. Interestingly, this proposal reflects the rules that applied to life interest trusts before the last significant (and highly controversial) changes to the IHT legislation in 2006.
  • Unless passing to a spouse or civil partner, all pension funds left at death would be taxed at the flat rate of 10%, or added to the estate and the excess taxed at 20% if the value was over £2 million.

Foreign domiciliaries

  • An individual's domicile should no longer be an issue for the purposes of IHT and, instead, residence should become the relevant factor.
  • Those who have been UK resident for more than ten out of the last 15 years should pay tax on all subsequent lifetime gifts and transfers on death on a worldwide basis at 10% or 20%, as appropriate, in the same way as those UK residents who were born in the UK.
  • Once foreign domiciliaries have been UK resident for more than ten of the previous 15 years, any discretionary trusts set up by them would be subject to the annual tax if any UK resident could benefit. The paper notes that consideration would need to be given to the application of an annual tax on the entire capital value of a trust in a situation where a UK resident only benefits on a discretionary basis and may not receive anything.

Reporting obligation

  • For the purposes of obtaining more information about the extent of lifetime transfers taking place, the paper suggests that HMRC and HMT should be given greater powers to collect more meaningful data about transfers of property through compulsory electronic reporting of lifetime gifts over the current annual exemption of £3,000, even if they are not immediately taxable.

Discussion points

While the paper makes a number of detailed proposals for reforming IHT, as described above, it is essentially a discussion paper. The authors set out the background to the taxation of wealth in the UK and elsewhere, the reasons for its taxation and the widespread resentment that such taxation engenders, despite the fact that relatively few households are affected.

In addition to their proposed reforms of IHT, the authors also consider a number of alternative methods for taxing wealth, including an annual wealth tax, an expansion of the existing system for taxing capital gains and the alternative option of a capital accessions tax (CAT). A CAT (a version of which exists in Ireland among other jurisdictions) would be imposed on the donee of a gift or inheritance, rather than the donor or the estate of a deceased person, as is the case with IHT. The advantages and disadvantages of each taxation method are reviewed, and the authors recommend that, alongside their proposed IHT reforms, policymakers should consider carefully the option of a CAT, given its potential benefits.

Our view

The APPG's proposals are interesting. In terms of simplifying the legislation, they have a number of points to recommend them. Not least, and as the paper recognises, they would make the role of the personal representative easier, as there would be no requirement to take into account lifetime gifts made by the deceased within seven, or sometimes 14, years of his or her death in calculating the estate's liability to IHT.

Whether the proposals, if implemented, would achieve the desired object of improving the public's perception of the fairness of the tax is a matter for debate. To the extent that people perceive IHT as a second tax on the same assets, retaining it but reducing the rate may be unlikely to change that view. The popularity of a proposal to remove reliefs and the opportunity to make PETs, even with the increase of the annual exemption to £30,000, may also be in doubt. Businesses and farms would be significantly impacted by the proposed removal of BPR and APR. The need to pay tax on death, even with a ten year interest-free period to do so, could affect the ability of some families to carry on trading or farming.

The suggestion that all lifetime gifts above a minimum value should be registrable raises significant issues in relation to privacy. Unless there is a liability to tax, it should be possible for people to manage their assets and transfer them to whomsoever they wish without having to report to HMRC.

With regard to foreign domiciled individuals and their families, the paper is clear that its intention is not to discourage foreign investment in the UK. Nevertheless, coming so soon after several years of constant changes to the taxation system for foreign domiciliaries and non-UK residents, if the proposals in this paper were to be taken up by this or a future Government, it would not be surprising if this was seen as yet another attack on them.

Clearly at this stage, the APPG's paper is effectively a discussion document and, as such, there is no indication that the proposals will be taken forward at the forthcoming Budget on 11 March or at any future time. Nevertheless, the paper makes a number of thought-provoking suggestions and it will be interesting to see whether any of the group's ideas appear in Government policy or lead to a consultation in the future.

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