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Inheritance tax ‘desperately needs to be reformed’

By Simon Hodges, Director of Profession at STEP

Today’s Wills and Probate readers will be all too familiar with the public perception of inheritance tax (IHT) as being too complex, ineffective and unfair. It’s certainly our view at STEP. With high property prices and a nil rate band that has been frozen since 2009 (and extended to 2028), more people will fall into the IHT net in the future.

That means advisors will need to help more clients understand the potentially unexpected impact of this tax on the estates of loved ones. STEP has been calling for reforms to the inheritance tax system for several years. A low-rate inheritance tax with few reliefs and exemptions would greatly simplify the system and increase fairness for families.

These reforms were considered in an All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness report in 2020. The report called for the introduction of a “flat-rate gift tax”.

The premise of this proposal was that it would replace the current IHT system’s multitude of reliefs and exemptions. It 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 currently levied.

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.

Our own research among 500 of our members, including solicitors, tax advisors, financial planners and accountants, showed that the majority (65%) agreed with this recommendation. Most of our members believe a 10 per cent flat rate is the best way to simplify the system and discourage avoidance by wealthier families.

In fact, an IHT overhaul is more popular as a revenue raiser (36%) than either a one-off wealth tax (29%) or an annual wealth tax (13%) among industry professionals who advise families on inheritance planning.

Similar arguments were considered in a paper written last year by Tim Pitt, a former advisor to both Sajid Javid and Philip Hammond. The paper, Road to Credibility, was written for the think tank Onward. It proposed abolishing inheritance tax and replacing it with a lifetime gift allowance as a fairer way of taxing inheritances. It also suggested that the vast system of reliefs should be reformed.

The tax system needs remedying. Our members are practitioners who know better than anyone the complexity of inheritance tax. There is strong support from them for the government to revisit the APPG proposals. There is also likely to be support from the public, with inheritance tax named the most hated tax by respondents to a survey by Hargreaves Lansdowne in 2021.

While there were reports that the Treasury was working on options for cutting or abolishing some tax reliefs in the UK for the Chancellor to consider, the 2023 Spring Budget did not deliver major change. While it did not address the bigger issues, the Budget did bring some welcome simplification to the existing system. The Chancellor announced plans to formalise and extend income tax concessions for low income trusts and estates, making calculation and reporting more straightforward.

HMRC also intends to remove non-taxpaying trusts from IHT reporting requirements. STEP has been calling for such changes and welcomes these moves. However, IHT will continue to justify its tag as the most hated tax unless it is significantly reformed.

Simon Hodges is Director of Policy at STEP. He has over 15 years of policy experience gained at institutions, including HSBC, Citigate Dewe Rogerson and at the Treasury, where he started his career. His decade at the department saw him perform roles, amongst others, in the Budget team and the Ministerial team, including as Head of the Special Advisers office.

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