The main change would see the current regime replaced by a flat rate of tax at 10% for all lifetime gifts, as well as those on death, with a possible higher rate of 20% applying to assets over £2m.
Individuals would have a lifetime giving allowance of £30,000 per annum, with gifts in excess of this being subject to an immediate tax charge. A new death allowance would be introduced at a similar level to the current nil rate band (£325,000) which would be transferable between spouses if not used on the first death.
Exemptions from IHT on gifts to spouses and charity would be retained, but all other exemptions and reliefs would be abolished. This would means assets which currently qualify for agricultural property relief or business property relief would be taxable under the proposed regime. However, the tax could be paid in interest free instalments over ten years, to prevent the business or agricultural asset in question needing to be sold to pay the tax.
The report also suggests an amendment to capital gains tax (“CGT”) to remove the current CGT uplift on death, with assets instead passing to beneficiaries at the deceased’s own base cost rather than at probate value. A similar provision would apply on lifetime gifts of assets, so that any gain arising would be held over and the recipient would take on the donor’s base cost. On a future sale, CGT would be payable on the whole gain.
The new regime would abolish a number of complicated aspects of IHT, including the rules on gifts with reservation of benefit and the pre-owned asset tax. As all lifetime gifts would be taxable in the same way as on death, there would be no need for these complicated anti-avoidance provisions.
The current 36% rate of IHT which applies where a person leaves 10% of their estate to charity would not be replicated under the proposals. Furthermore, the report suggests that the complex concept of domicile be abolished, with IHT instead applying to worldwide assets once a person has been resident in the UK for 10 out of the previous 15 years.
The report also suggested changes to the taxation of trusts. Funds added to trusts would be subject to the same 10% tax charge as outright gifts. Similarly, where a trust has an ‘interest in possession’ (otherwise known as a life interest) the trust’s assets would be taxed on the death of the beneficiary as if they owned the assets. This would make such trusts tax neutral when compared to an outright gift to a beneficiary.
Discretionary trusts would be subject to a new regime comprising of annual charges calculated as a percentage of the trust’s value, as well as charges on assets leaving the trust.
At present it is unknown whether these proposals will make it into law, and when this might happen. The government will most likely want to consult before introducing such significant changes, but it is clear there is potential for a major shift in coming years.