In my past career as a lawyer, I used (only half jokingly) to wish for the kind of tax reform that would put me out of a job. Now that I focus on strategy, I wish even more that clients were free to make decisions based on their family’s needs, or the future good of the family business, rather than to minimise tax. Could my wish be about to come true?
If a newly-proposed reform happens, it will change the way people think about estate planning. It’s just a recommendation, but a new report on Inheritance Tax, published on 30 January 2020, could start a revolution in the UK’s tax system.
Last year, the Office for Tax Simplification consulted on how to simplify the UK’s complex and expensive Inheritance Tax rules. Now, the All-Party Parliamentary Group on inter-generational fairness and inheritance has said that isn’t radical enough, and wants to replace the whole regime. It’s the most interesting read in the tax world for many years.
The Inheritance Tax rules are universally unpopular, and often irrational. I remember once explaining to a foreign client, who had never lived in the UK but had a house here, that on his death 40% of its value would go to the UK government. His incredulous expression said it all.
The new report invites us to imagine a system under which you don’t have to survive 7 years after making gifts to escape 40% tax on death; where you can (as in the past) create trusts to ensure that children don’t inherit too soon; and where those moving to the UK don’t have to craft complex trusts or plan to leave the UK for fear of substantial taxes.
Under their proposals, all gifts (in life or on death, to an individual or a trust) would suffer 10% tax, and discretionary trusts would pay a small annual charge. At present, assets are rebased on death (eliminating past gains), but a lifetime gift is subject to Capital Gains Tax, so a person giving away (say) a house pays CGT on the increase in value, as if he had sold it. That would all change, so the recipient of any gift would inherit the donor’s base cost. If he later sells the asset, he pays tax on the whole gain, as he receives all the proceeds.
The report isn’t without controversy – it suggests that the UK should use residence, not domicile, as a test for Inheritance Tax. So a UK resident foreigner would become subject to Inheritance Tax after 10 years of residence (as would any trusts he has created, if UK residents can benefit). The authors’ theory is that 10% tax is no disincentive to foreign nationals to move to the UK, and provides certainty.
A similar philosophy underpins the report – if everything is taxed at 10%, there’s little scope for schemes or planning. Most reliefs would be abolished, and generous annual gifting allowances (£30,000 per year) would reduce the compliance burden.
Let’s hope this becomes law. This clever bit of disruptive thinking about tax policy could liberate families to think about what’s really important to them.