In a report published today (January 29) the All Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness urged the government to change the current system which it claimed was "complex, ineffective, riddled with anomalies, distortionary and unfair".
The report suggested most reliefs on inheritance tax should be scrapped, with the flat rate of 10 per cent only rising to a maximum of 20 per cent on death estates of more than £2m.
The cross-party group of MPs pointed to evidence which showed rates above 20 per cent start to incentivise tax planning and by cutting rates the rules would lead to less tax avoidance.
The current IHT system is unpopular and ripe for reform...APG on Inheritance Tax and Intergenerational FairnessJohn Stevenson MP, chairman of the APPG, said it was clear the tax raised "strong opinions across the political spectrum" but warned the current way the tax was levied and its reliefs led to a "strong sense of injustice".
He added: "...the rich get away with not paying and IHT is perceived as an unfair penalty on hard working savers.
"Our bold proposals for reform seek to address this unfairness by simplifying the system and ensuring that the higher value estates that currently take advantage of so many reliefs and exemptions actually pay some IHT."
Rachael Griffin, tax and financial planning expert at Quilter, said: "The APPG suggests a complete overhaul of inheritance tax and it’s easy to see why. As with most complicated things it’s easier to just scrap the whole thing and start again.
"Their proposal has the magical ingredient needed by most successful proposals – simplicity. It is easy to follow and people do not need a law degree to navigate secret clauses."
The report also moved to end large amounts of money being passed on free of tax by lifetime gifts, calling instead for sums of more than £30,000 each year yo be taxed instantly at 10 per cent.
But Ms Griffin warned simplicity may also lead to some people losing out and taxpayers would now need to think carefully about lifetime gifting.
She added: "Under the APPG proposals there will be an annual allowance of £30,000 a year. However, we know that many parents and indeed grandparents are looking to pass on their wealth while they are still alive, be it for school fees or to get on the housing ladder.
"And with the generations of today being the first to be worse off than their parents, taxing the flow of the wealth being passed down might not win the government many favours."
In today’s report the MPs also called for HM Revenue & Customs and the Treasury to collect more data by enforcing compulsory electronic reporting on larger lifetime gifts, which they said would allow for "more rigorous analysis" on wealth transfers.
A Treasury spokesperson said: "Inheritance Tax makes an important contribution to the public finances. We keep the tax system under constant review and will consider the APPG’s findings."
rachel.mortimer@ft.com
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