Radical changes aimed at simplifying Inheritance Tax (IHT) sound attractive on the surface but there are disadvantages, particularly in the agricultural sector, a Dorset expert has warned.
Jerome Dodge, Head of Private Client at award-winning law firm Blanchards Bailey, says there will be winners, but also many losers if IHT is replaced with an entirely different regime.
He has also urged anyone considering estate planning measures to act now in case currently existing tax reliefs are swept away by changes in legislation.
The All Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness (APPG) proposed a complete overhaul of the present system because it is ‘complex, ineffective, riddled with anomalies, distortionary and unfair’.
The APPG suggested reforming the IHT system and replacing the current 40 per cent rate charged on estates above the available IHT allowances with a 10 per cent rate for estates above £325,000 (£650,000 for a married couple or those in a civil partnership) increasing to 20 per cent for estates worth more than £2 million.
Currently, most lifetime gifts above £3,000 in a tax year fall into the IHT net if the giver does not survive for seven years. The proposed system would have an annual allowance of £30,000 and any gift in excess of this would be taxed at 10 per cent no matter how long the giver lives.
Mr Dodge said: “On the face of it, these changes seem attractive to current taxpayers and, in principle, the system would be simpler, but there are also some significant downsides.
“The APPG is suggesting the abolition of Agricultural and Business Property Relief, which currently exists to ensure that agricultural and business assets can be passed on to future generations free of tax with a view to keeping farming operations and businesses intact.”
He added: “Likewise, currently, estates benefit from a tax-free uplift of assets for Capital Gains Tax and the APPG has proposed removing this, so that the beneficiaries would acquire assets at the deceased’s original acquisition costs for tax purposes, which could lead to substantial charge to Capital Gains Tax when they are ultimately sold.”
The aim behind the proposed change in legislation, which will now be considered by the Treasury, is to encourage less tax avoidance and to ensure higher value estates are paying more IHT because the APPG believes it will be less advantageous for wealthier people to undertake tax planning schemes.
Mr Dodge said the vast majority of professionals recognise that the current system is unfair – for instance, there are significant disadvantages if you are not married or if you do not have children – and he believes an overhaul of the current system is long overdue.
He added: “Unlike previous reviews, there is some momentum behind this possible change, mainly because IHT is very unpopular with voters.
“It is quite possible that Boris Johnson would want to be known as the Prime Minister who abolished the current IHT system, even if the small print is likely to mean that this is not as good as it sounds.”
Mr Dodge added that the potential changes emphasised the need for people considering estate planning measures to act now, because some of the reliefs which currently exist were likely to be abolished or significantly reduced.
“For many people, there are significant tax-saving steps which could be taken now, but which might not be available in the future.”
Jerome Dodge is recognised as a recommended lawyer in the Legal 500, the leading independent guide to law firms, and heads up the Private Client Department at 80-strong Blanchards Bailey which won the Private Client Team of the Year awards in the 2018 and 2019 Dorset Legal Awards.
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