You might have seen the press mention a recent report from the Resolution Foundation think-tank called 'Passing on: Options for reforming inheritance taxation.'

    The report was published as part of the Resolution Foundation's Intergenerational Commission initiative, and can be read in full here. It is extensive, thoughtful and pulls no punches. It is fair to say it definitely has a point of view.

    When you come to think of it, inheritance tax (IHT) has been in the news a lot over the last few months without anything material really happening. Firstly, the Chancellor has directed the Office of Tax Simplification (OTS) to review IHT.

    While the review is mostly charged with reviewing the administration of IHT, the OTS has also been directed to look at how gift rules interact with the wider IHT system, and whether the current framework distorts taxpayers’ decisions surrounding transfers, investments and other relevant transactions.

    We also have a new disclosure of tax avoidance schemes (Dotas) hallmark telling us what schemes need to be notified for a Dotas reference number. Having a Dotas number doesn’t imply a scheme will fail in its purpose, nor does it represent any form of  'approval'.

    Despite this, it’s still nice that most of the schemes commonly used by financial planners will not have to register. The fairly long list of acceptable arrangements includes, among others, straight gifts to trust, loan trusts and business relief schemes.

    It also seems that discounted gift trusts that are substantially the same in form as those entered into before 1 April 2018 will also be treated as “related transactions” and excluded from the need to register.

    'Unpopular and unfixable'

    So, what's left for the Resolution report to focus on? Well, pretty much everything. Never mind root and branch reform, this is leaves, bark… the whole enchilada, so to speak.

    The report's underlying premise is that IHT is “unpopular and unfixable”. It articulates clearly the dichotomy represented by a tax that is, in their view, easy to avoid but also a cause of much anger.

    It explains how the tax in its current form does little to encourage meaningful redistribution of wealth and as a result continues to consolidate wealth in already wealthy families. Some of the highlights underpinning these conclusions are:

    • Inheritances and other gifts totalled £127bn in 2015/2016;
    • Inheritances have more than doubled over the past 10 years;
    • Inheritances (especially in the form of inherited housing from baby boomer parents) are substantially boosting the wealth of millennials;
    • The average age for 'millennial inheritance' is 61;
    • Among older millennials (those born between 1981 and 1985), the top 10 per cent owned 54 per cent of the group’s net wealth by age 30;
    • IHT is now limited in scale. For every £100 raised in taxes nationally (£708bn in total), only 77p comes from IHT, equating to around £5bn;
    • Although wealth transfers are increasingly important, the IHT yield is relatively low. Of the £127bn of inheritance, the £5bn in IHT represents an effective rate of 3.5 per cent. Between 2006/2007 and 2022/2023 IHT receipts are forecast to grow less than a quarter as fast as inheritances.

    The Resolution Foundation’s big idea is to shift IHT to a “lifetime receipts” based tax - a tax on the recipients as opposed to a tax on the 'givers'. They believe such a change would deliver both practical benefits and a more positive public perception.

    They accept IHT is a politically sensitive tax. But Resolution believes for the good of greater intergenerational fairness, a change has to be made.

    How would it work?

    A lifetime receipts tax would not be without precedent as a receipts-based tax already operates in Ireland and France. The proposal is based on two principles:

    • A person would need to keep track of cumulative receipts excluding gifts of £3,000 or less and would exclude gifts from spouses/ civil partners;
    • There would be a cumulative lifetime gift allowance of £125,000, so up to this amount could be received tax-free in a lifetime.

    On this basis, Resolution’s modelling shows a much lower rate than 40 per cent could be used while bringing in substantially more tax revenue. A basic rate of 20 per cent and a top rate of 30 per cent is suggested. Assuming forecast rates of inheritance and gifts, the receipts tax would generate £11bn in tax compared with the forecast £6bn under the current system.

    According to Resolution:

    • A progressive recipient-based tax could give donors an incentive to leave bequests to those that haven’t received much before;
    • The lifetime receipts basis (with no more seven-year-only cumulation) would remove many ways to avoid tax; and
    • Business relief (which costs £710m a year) and agricultural relief (at an annual cost of £515m) could be reviewed and better targeted to remove any tax-driven motivation for owning the assets.

    So, all in all some pretty radical stuff. With the timing as it is, these suggestions will not go unnoticed by the OTS in its review, though a fundamental shift to a lifetime receipts basis of taxation may be a bit beyond their brief.

    The main detailed recommendations made by the Resolution report are: abolish IHT and replace it with a lifetime receipts tax, paid by the beneficiary; give each person a lifetime receipts tax allowance of £125,000 indexed to inflation; and beyond this, apply a progressive rate schedule with a basic rate of 20 per cent and a higher rate of 30 per cent above £500,000.

    Lifetime gifts would be included in the tax, excluding those of £3,000 or less (per donor per year) with the current additional exemption for “normal gifts out of income” abolished. Transfers to spouses/ civil partners and charities would be exempt.

    Business relief and agricultural relief, including within trusts, would be restricted to small family businesses by:

    • Introducing a cap of say £5m for the value that can receive relief;
    • Increasing the minimum ownership period from two years to perhaps five, and introducing a period after receipt in which tax relief can be clawed back if the inherited assets are sold on;
    • Introducing a “farmer” test for agricultural relief, as in Ireland and France, whereby the overall assets of the beneficiary (including the inheritance) must comprise at least 80 per cent agricultural property; and
    • A “family business” test for business relief whereby the beneficiary must receive at least 25 per cent of the business and the donor must have had a demonstrable working relationship with the company.

    The proposed reforms would see the trusts tax regime redesigned to reflect the lifetime receipts tax, as well as the removal of the tax-free treatment of pension pots inherited on deaths before age 75. For recipients other than spouses or civil partners, both the lifetime receipts tax and income tax would be levied on pensions to give parity with other assets.

    Finally, the recommendations would also mean scrapping forgiveness of capital gains tax on death, at least for additional residential properties and assets qualifying for business relief or agricultural relief.

    Whatever may or may not result from the OTS review, it all serves to remind us of the importance of IHT in intergenerational planning.

    As with all tax planning, while it is essential for advisers to have an eye to “what might be”, plans can only be built on “what is”. But this should be done with an absolute commitment to keep the plan under regular review, in light of changing personal objectives and changing legislation.

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