Paving the way for a Wealth Tax?

Even opening a piece by saying, ‘Inheritance Tax (‘IHT’) is well overdue a reform’, is likely to elicit a collective groan. We have been here before. Capital Transfer Tax was replaced by IHT in 1984; there were significant reforms regarding Trusts in 2006; and we have seen, in recent years, changes to the domicile rules bringing some properties owned by non-UK domiciled individuals into the IHT net.

Last July, Philip Hammond, the Chancellor from what seems an age ago, thanked the Office for Tax Simplification (‘OTS’) for their report on reforming IHT, saying that this document would be ‘laid before Parliament’. This paper had made a number of recommendations, which amongst other measures, called for a single personal gift allowance for all lifetime gifts; an overhaul of the seven year gift rule; and changes to the interaction between IHT and Capital Gains Tax (‘CGT’), together with wholesale reform of business and agricultural property reliefs. In July last year, of course, we were in the dying days of the Theresa May premiership and, other matters being to the fore, the OTS report was to all intents and purposes left alone.

But, a few weeks before ‘lockdown’, the ‘All Parliamentary Group for Inheritance and Intergenerational Fairness’ produced its own suggestions. The use of the word ‘fairness’ in such a context is bound to create a sense of dread – fairness is the one thing that is rarely achieved. Be that as it may, it is worth noting how the changes envisaged in this document, together with the earlier OTS report, suggest a direction of travel that is towards IHT being paid at the time a gift is made rather than largely at the time of death.

Amongst the measures suggested are the following:

  • Abolishing Potentially Exempt Transfers (‘PETs’) (the seven year gift ‘window’).
  • A tax on transfers during life, ranging from 10% to 20% depending upon the size of the gift, with the tax being retained by the donor to settle with HMRC.
  • The nil-rate band to be replaced with a ‘death allowance’ with tax bands ranging from 10% to 20% depending on the size of the estate.
  • No CGT uplift on death, meaning that the beneficiaries will acquire assets at the deceased’s base cost (bear in mind that there are concurrent discussions regarding bringing CGT rates in line with those for Income Tax).
  • An annual charge on all Trusts i.e. not just periodic charges on Discretionary Trusts.
  • Abolition of Business and Agricultural Reliefs.

The Group also apparently discussed an annual Wealth Tax, which has sparked off some speculation, particularly give the ‘unprecedented’ fiscal situation in which the Government now finds itself. Of course, such a tax would be against Conservative philosophy and was thrown up as a threat from Labour during both the 2017 and 2019 election campaigns.

But, dress it up as something else: an NHS ‘surcharge’, for example, where all can show that we are in this together? Or a change to rateable values on residential property? The current Council Tax rates in England are referenced to values in 1991 after all.

There would of course be concerns over valuation of assets; liquidity for those who are asset rich but cash poor; reporting and anti-avoidance, but it is conceivable that ‘wealth’, however defined, could be considered as ripe a source of much needed revenue as private pensions have been since these were reformed in 2006.

There was no mention of the Group’s paper in the Chancellor’s March Budget and, as expected by many, no changes were announced in the summer Statement given by Rishi Sunak last week. However, could we see measures included in an autumn ‘Emergency’ (perhaps called a ‘new normal’) Budget with changes to come in from April 2021?

With so many uncertainties ahead, this may be the time to consider how these changes may affect your long-term financial plans.

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