A cross-party committee of MPs have called on the government to consider replacing inheritance tax with a 10 per cent “gift tax” on transfers of money during the donor’s lifetime or upon their death.

The All-Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness says that IHT is often criticised “complex, ineffective, riddled with anomalies, distortionary and unfair”.

In a paper published today, the group chaired by Conservative MP John Stevenson argue the tax is “unpopular and ripe for reform”.

The MPs suggest that rather than the current system which applies a tax rate of 40 per cent, but then offers a wide array of complicated reliefs, the government should instead apply a flat rate of just 10 per cent. 

But the downside would be that the tax applies to gifts during a person’s lifetime and not just on their death.

The report suggests that there should be a lifetime allowance of £30,000 so that people can still give some money to their relatives tax-free.

It also recommends that there should be an allowance for gifts upon death similar to the current threshold for IHT, which is £325,000 per person.

Parents who leave their home to their children or grandchildren when they die have an increased tax-free IHT threshold of £475,000 per person.

By the 2020/21 tax year, couples will be able to pass on up to £1m (including their home) to their children tax-free.

But the report proposes radical reforms.

It says: “The APPG suggests a rate of 10 per cent but accepts that policymakers should determine the appropriate rate as they have better access to the data necessary to determine the rate at which taxpayer behaviour changes. 

“The key principle is that it should be low enough for the tax to be broadly based without the need for complex reliefs. 

“A flat-rate gift tax with fewer reliefs would be simpler, more broadly based, lead to less avoidance and ensure the UK’s competitiveness in attracting wealthy people to live (and die) in the UK. 

“Aligned to this change, all reliefs other than spouse and charity exemptions would be abolished and the tax-free capital gains tax uplift on death would be abolished. 

“There would be a death allowance at a similar level to the current nil rate band to ensure that small estates not currently paying tax will remain unaffected by the changes. 

“There would also be an annual lifetime allowance of £30,000 on lifetime gifts.”