AAT urges the Government to halve inheritance tax and end most exemptions

AAT has welcomed a new call for inheritance tax reform by MPs and is appealing to the Government to make the system fairer and simpler.

Echoing the report by the All-Party Parliamentary Group on Inheritance and Intergenerational Fairness, and ahead of the Chancellor’s Budget on Wednesday 11 March, AAT has called for several changes to be made to the current process around inheritance tax, including halving the current headline rate from 40% to 20%.

Inheritance tax raises well over £5bn a year and is expected to reach £6.3bn by 2023/24, according to the Office for Budget Responsibility. However, fewer than 25,000 estates are liable for inheritance tax each year, which is less than 5% of all deaths.

There are also currently several exemptions and reliefs, some of which are complicated and may require professional advice. AAT is also calling on the Government to end most of these exemptions, including:

• Removing preferential treatment for charitable giving, due to substantial lost revenue and lack of evidence to suggest the reduced rate has led to an increase in charitable giving

• Scrapping Agricultural Property Relief and Business Property Relief, including relief for Alternative Investment Market (AIM) listed shares

• Ending the £3,000 annual gifts exemption

AAT also recommends taxing all pension funds at death at the flat rate of 20% unless passing to the spouse/civil partner.

The only exemption allowed under the AAT recommendations would be for spouses/civil partners and direct descendants up to a value of £500,000, including property, with 20% inheritance payable on any amount thereafter.

These recommendations build on AAT’s response to the Office for Tax Simplification’s review of inheritance tax in 2018.

Mark Farrar, Chief Executive, AAT, said:

“Given the unpopularity of this tax, its relatively high headline rate and the perceived unfairness of many of the current exemptions and reliefs, continuing with inheritance tax in its current form for much longer is both unlikely and unwelcome for many people. That’s why we’ve made these proposals for reform.

“Although halving the headline rate of inheritance tax may lead to a reduction in the tax take, ending the exemptions and reliefs, as well as simplifying the inheritance tax regime, should broaden the tax base and increase revenue for investment in public services. Although the changes will largely balance each other out in financial terms, they will make the system considerably fairer and more effective. The regime will be simple enough for everyone to understand and low enough for people to voluntarily pay, whilst everyone would be treated equally and know exactly what their tax position is.”