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MPs call for complete overhaul of complex Inheritance Tax system

Written by: John Fitzsimons
MPs have called on the government to remove almost all of the tax reliefs currently available for Inheritance Tax ‒ including the residential nil rate ‒ as part of a complete overhaul of how the tax works.

Under the current system, married couples are potentially able to pass on £1m, including the family home, without paying any tax thanks to the combination of the personal tax thresholds, worth £325,000 each, and the residential nil rate band worth £175,000, which is transferrable between spouses.

However, the All Party Parliamentary Group on Inheritance and Intergenerational Fairness ‒ a cross-party collection of MPs ‒ has published a report on how to revamp the tax and make it fairer.

This includes removing virtually all of the tax reliefs, which as well as the residential relief include things such as annual allowances on gifts to family members.

And rather than the current setup, where estates are charged at 40% on the value above the Inheritance Tax threshold, the politicians propose a simple flat rate of 10%, with estates worth above £2m charged at 20%.

The report notes that even though relatively few estates have to pay the tax ‒ fewer than 5% of deaths result in an Inheritance Tax bill ‒ it is a topic that arouses passions and suspicions, with a “strong sense of injustice” that richer people are adept at avoiding paying it, while hard working savers have no alternative.

It adds that introducing a flat rate would remove “many of these complications by removing the boundaries around which so much tax avoidance operates”.

The report states: “The key principle is that it should be low enough for the tax to be broadly based without the need for complex reliefs. A flat-rate gift tax with fewer reliefs would be simpler, more broadly based, lead to less avoidance and ensure the UK’s competitiveness in attracting wealthy people to live (and die) in the UK.”

Michael Culver, chairman of legal group Solicitors for the Elderly, said: “The proposals from the APPG on Inheritance Tax reform are encouraging, and would bring about a refreshing change to the system. Whilst the legal profession could be negatively impacted, as people may decide to no longer seek tax planning advice, it would certainly leave families much better off.

“I do however question whether the proposals will see the light of day. Not only is the Inheritance Tax system complex, meaning an overhaul wouldn’t be straightforward, but Inheritance Tax contributes a huge amount to public finances, so I’m not convinced the Treasury would be happy with such a loss to public funding.”

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