Inheritance and Intergenerational Fairness – IHT Review


The All-Party Parliamentary Group (APPG*) for Inheritance and Intergenerational Fairness has produced a set of radical proposals for inheritance tax (IHT) reform.

The report’s arrival could hardly be timelier as we await the Budget on 11 March. The Chancellor should then reveal his response to the two papers on IHT simplification published by the Office of Tax Simplification (OTS). The APPG report is more radical in its content than the OTS work because the OTS had a specific remit of simplification, not redesign. Thus, the APPG report makes proposals which the OTS could not. The result is a new perspective on a tax which, as the APPG notes, has ‘more or less’ been left untouched by successive governments for 35 years.

Unconstrained by any government terms of reference, the APPG recommends ‘replacing the outdated IHT regime with a more understandable alternative that reflects changes in modern society’.

The main features of the APPG alternative would be:

Nil Rate Band and Residence Nil Rate Band

These would both be scrapped and replaced by a death allowance of ‘something like £325,000’. Moving from a nil rate band to a (transferable) death allowance would remove the opportunity to use the nil rate band for gifting every seven years. Culling the Residence Nil Rate Band would remove a large layer of complexity but simultaneously increase the number of estates paying tax as the theoretical 2020/21 threshold for a married couple/civil partners would drop from £1,000,000 to £650,000. Based on the OTS report data, the number of taxpaying estates could increase by 70%.

Lifetime gifts

All the existing lifetime gift exemptions, such as small gifts and normal expenditure, would be scrapped and replaced by a single annual gifts allowance, which the APPG suggests would be set at £30,000. The OTS had put forward a similar approach, albeit their figure was £25,000.

Any gift above the new allowance would be taxable but would not be added back to the estate for IHT calculation purposes on death, regardless of when that occurred. Potentially exempt transfers and seven/fourteen-year accumulation period issues would thus disappear. Taxing all lifetime gifts above the allowance would also mean that reservation of benefit and pre-owned assets income tax rules could be abolished.

The APPG notes that HMRC has little data on lifetime gifting, other than via estate returns and proposes compulsory electronic reporting of lifetime gifts over the current annual exemption of £3,000.

Tax rates

For lifetime gifts above the £30,000 exemption, an immediate 10% tax charge would apply, to be withheld by the donor. For example, once the allowance is exhausted a net gift of £90,000 would create a tax liability of £10,000 ([£90,000 + £10,000] @ 10% = £10,000). If the gift were of an illiquid asset, then the donor would have the option to pay over ten years in interest bearing instalments (although in the case of businesses and farms this could be interest-free instalments).

At death, a rate of 10% would apply on the first £2m of the estate above the death exemption, with 20% applying thereafter.

Business and Agricultural Relief

These would both be scrapped and replaced with an option to pay tax over ten years in interest free instalments. The APPG reckons that such an approach should be affordable as it would represent a yield of 1%-2% on the assets involved.

Capital gains tax uplift on death

This would also be scrapped, with the recipient inheriting the base cost of the deceased. Any capital gains tax (CGT) would only be payable on a subsequent disposal. In parallel, the same no loss/no gain approach would apply to all lifetime gifts rather than being restricted to chargeable transfers and relievable assets as at present.


All pension funds remaining 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) unless passing to the spouse/civil partner. There is no comment on whether income tax would continue to apply from age 75 or how the two would interact. Ironically the result could be a return to a total tax charge on death of 55% (or higher), as used to apply before April 2015.


Gifts into trust would be taxed as lifetime gifts, with a flat tax rate of 10% above the £30,000 allowance. Trusts would lose their nil rate band. An annual (unspecified) fixed rate tax would apply to trusts with discretionary beneficiaries and tax would be levied when property comes out of the trust.


The APPG takes the next logical step from the way UK legislation has been moving and proposes the concept of domicile be abandoned. It suggests tax residence becomes the main connecting factor and that those who have been UK tax resident for more than ten out of the last fifteen years should pay tax on all subsequent lifetime gifts and transfers on death. Excluded property trust advantages would also disappear at the ten year point if any UK resident could benefit.

This revamp would still leave IHT based on the donor rather than the recipient, although the APPG suggests that the alternative donee-based tax (capital accessions) should also be considered by the Government. The tax rates proposed need to be treated with some caution, as the APPG accepts that the Treasury and HMRC have better access to the data necessary to determine the rate at which taxpayer behaviour changes. However, the APPG principle should stay in place: low tax rates across a broader base, creating less incentive to take avoidance measures.

* All-party parliamentary groups (APPGs) are informal groups of MPs, members of the House of Lords and external individuals and organisations with a common interest in particular issues. They sit somewhere in between select committees and think tanks such as the Institute for Fiscal Studies (IFS).

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