Inheritance Tax Faces Radical Overhaul.

Cross party MPs have been in deliberation now for some time, about the changes to Inheritance Tax.

Across party group of MPs, have recommended radical changes to Inheritance Tax, which could lead to lower bills for estates caught by IHT. But the proposed shake up to the Nations most hated tax, would also see the loss of certain loopholes, which many people currently use to pass on their wealth.

Currently, inheritance tax is charged at 40% on the estate, once they cross the tax-free threshold of £325,000. The all parliamentary group on inheritance and integrational fairness (APGG) is proposing slashing this to 10%, but the seven-year rule, a popular method for parents and grandparents to give substantial sums free to their relatives could be scrapped.

Such gifting at the heart of the changes proposed by MPs. Currently people can give away up to £3000 a year tax free, but MPs are proposing to cap this at a lifetime allowance of £30,000 and make people declare any gift in excess of £10,000.

The seven-year rule is known as a ‘potential exempt transfer’ as it is only tax free if the donor lives at least seven years after the gift has made.

There is what is known as ‘Taper relief’ which means that during that period, if the person who died has not made it to the full seven years, there is a reduced scale of IHT to pay.

Many people use the rule to help children or grandchildren buy their first home, or to help with paying school or university fees.

The current gifting system incentivise planning ahead, while also ‘preventing people from avoiding an inheritance tax bill, by simply giving all of their money away on their deathbed’.

The general industry view we believe, is that whilst the proposals are welcome, the Government should be warned that it needs to be careful about removing incentives, for people to pass on wealth.

‘The generations of today are the first to be worse off than their parents, so, taxing the flow of wealth being passed down to them, might not win the Government any favours’.

One of these incentives in the MPs sights, is what is known as the ‘main residents nil rate band’ which in the current tax year is worth £150,000 when a home is passed to a direct descendant in a will.

This is reduced for estates worth over 2 million pounds, however.

MPs are also keen for proposals to limit the opportunities for tax avoidance, created by the current complexity of IHT rules. Their evidence concluded that tax rates above 20% incentivises tax planning, ‘by cutting rates, the proposal will lead to less avoidance, while keeping the UK attractive for wealthier individuals’.

We would welcome any measures to simplify the current inheritance tax regime, thereby decreasing opportunities for avoidance and abuse.

Whilst only 5% of UK estates are liable for IHT, the rising price of houses, particularly in Southern England, means that more families are becoming liable for the tax. There are many exemptions, however which create confusion for those tasks with managing their relative’s affairs.

The proposed changes are part of a wider social debate, about how wealth is passed between generations, and whether the current tax system is fair. The rising costs of housing, and the phasing out of many final salary pension schemes, have created friction between the generations.

In many cases, inheriting property wealth is often the only option for young people to get on the housing ladder.

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