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Wealth redistribution – a bridge too far?

Think tank recommends replacing Inheritance Tax

Inheritance Tax (IHT) is probably the tax that many people would like to see scrapped. It certainly needs overhauling because of its complexity and lack of effectiveness, and this is something that the Office of Tax Simplification (OTS) are currently looking at in their review of IHT. In the meantime, the Intergenerational Commission (IC), an independent research and policy organisation, has come up with its own recommendations for radical reform.

IHT is principally a death duty and to a lesser extent a tax on lifetime gifts. Other than spending all your wealth before you die, IHT planning is necessary to ensure that you leave as much as you wish to your loved ones. The IC however don’t approve of this concept and want to do away with IHT and replace it with a Lifetime Receipts Tax which they have set out in a 42-page report.

Unfit for purpose

In 2015/16, inheritances and other gifts totalled £127 billion, an average of £4,600 for every household in the UK. Over the last 20 years inheritances have more than doubled and this trend is likely to continue over the next 20 years. Whilst such inheritances will boost the wealth of younger generations, the benefit is likely to be felt later in their lives, i.e. on average at the age of 61. What really sticks in the craw of the IC however is that inherited wealth will not be shared equally within generations.

For every £100 raised in taxes nationally (£708 billion in all), only 77p is raised though IHT (£5 billion). Compared to the £127 billion of inheritance and gifts, IHT represents an effective tax rate of only 3.5%. The reason for IHT’s impotency is partly down to its unpopularity and political pressure has led to large tax cuts. If IHT is therefore to play a more meaningful role in funding spending on Britain’s big challenges, then major reform is required, but many would argue that that has been the case for a good number of years anyhow.

Unpopular and unfixable

Consensus of public opinion, according to polls, is that IHT is considered to be the most unfair of the major taxes because:

  1. Taxing giving – it is negatively perceived as a tax on the dead rather than the living; on giving rather than receiving; and as double taxation of those who have earned the wealth rather than a tax on the income of the recipients of inherited wealth and gifts.
  2. High rate – the flat marginal rate of 40% appears high, particularly to basic rate taxpayers, and even for those whose effective IHT rate is far lower or nil.
  3. Ease of avoidance (for some) – it is perceived as being ‘voluntary’ for the rich and those who can afford IHT planning advice.

The main gripe that the IC has with IHT however, is that those with substantial liquid assets and longevity can plan to avoid it by making gifts out of their estates and surviving those gifts by at least 7 years, i.e. potentially exempt transfers (PETs), including using trusts and family investment companies.

The solution – Lifetime Receipts Tax

The IC believe that it would be preferable to tax the recipients of large inheritances rather than the donors, thereby ensuring that all large gifts are taxed equally regardless of whether they are near the time of the donor’s death or not. A Lifetime Receipts Tax (LRT) would achieve this and would replace IHT.

LRT would keep track of an individual’s cumulative receipts, excluding gifts of up to £3,000 p.a (small gifts allowance) and transfers between spouses. This would require HMRC maintaining a database recording each individual’s taxable gifts and inheritances. Is that truly realistic at this moment in time? I doubt that HMRC would even welcome that prospect given the current pressures that the department is under.

Fundamental to LRT would be a Lifetime Receipts Tax Allowance that would provide a tax-free allowance for the first £125,000 of inheritances and gifts over a person’s lifetime. There would be no retrospective taxation as gifts and inheritances before the date of introduction would not be included.

Beyond the £125,000 lifetime allowance, a basic rate of 20% tax would apply, with a top rate of 30% for lifetime receipts exceeding £500,000. If introduced in 2020/21, the IC estimate that LRT would raise £11 billion compared to IHT’s projected £6 billion.

The IC theorise that LRT would encourage donors to spread wealth wider by making use of as many lifetime allowances as possible. That, of course, assumes there are a sufficient number of beneficiaries to go around.

Business Property Relief (BPR) would be capped, with the minimum ownership period increased from 2 to, say, 5 years, and the introduction of a period after receipt in which tax relief can be clawed back if the inherited assets are sold on.

Death to no CGT on death

No Capital Gains Tax charge arises on increases in value of assets up to the point of death. The personal representatives or legatees are treated as acquiring the assets at the market value at the date of death. When personal representatives dispose of assets for sums in excess of the values at death, then CGT is charged accordingly. The IC propose to scrap this and make CGT payable at death or replace the market value of the asset with the original cost of the asset, i.e. what the deceased paid for it, at the point the asset is eventually sold.

A number of other changes have also been proposed.

American lawyer and Republican politician, Mike Fitzpatrick said of the USA’s own version of IHT:

“The estate tax punishes years of hard work and robs families of parts of their heritage by imposing a huge penalty on inheritance after death – a tax on money that has already been taxed.”

Doesn’t the IC’s proposal do exactly this and more so than IHT? I think this project is best left in the capable hands of the OTS.

By Andy Vessey

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4 thoughts on “Wealth redistribution – a bridge too far?”

  1. Carl

    Two points, firstly, the government have to raise tax revenue. So given three choices of how they take that revenue off me:
    1. Tax on my income
    2. Tax on my spending (VAT)
    3. Tax after I am dead
    It seems a no-brainer, they can have all the tax after I am gone!

    Secondly, The children of the wealthy have already had loads of benefit; enhanced experiences, additional opportunities, private education maybe. I see no reason they should feel aggrieved they then have to pay tax on that lovely large inheritance of free money. The one the underprivileged from the other end of town never get.
    The only problem seems to be the ease with which the tax seems to be avoided. That bit needs fixing.

    • Andy

      Hi Carl,

      To your statement ‘I see no reason they should feel aggrieved they then have to pay tax on that lovely large inheritance of free money’ I would counter that with the fact that for many, the inheritance is largely (and in some cases almost exclusively) made of up of the value of a family property.

      I guess it depends on your definition of ‘loverly large inheritance’. Properties have increased significantly in value to the extent that the younger generation are either priced out of home ownership or are burdened for 30+ years with the debt.

      It’s quite easy for a 3 bed terraced family home in London to greatly exceed the threshold forcing any occupant(s) to move out when the tax due on the property causes a sale of the property. Now, you might think that’s fair enough. However, my argument is that the owner is likely to have worked and paid taxes on their income. That post-tax income will then have been used to pay a mortgage and service a debt upon it (a non-HMRC tax if you like). The occupants will have paid council tax (again, post income tax) and if they drive to work paid fuel duty and VAT plus road tax, and insurance for the privilege. And so on and so forth with all other consumer goods taxes etc.

      I find it deeply unfair that a lifetime of modest living and paying taxes will then be rewarded with yet more taxation at a time of grief for the family and to compound matters the possibility of forcing out the family home occupants.

      I think a MUCH fairer tax would be to simply tax land ownership full stop. All land should be taxed and exclusions made or rebates given for certain purposes – perhaps if the land is productive (i.e. active farmland) or is the primary family home and a certain dimension of space. In that way all the extremely wealthy people that have vast swathes of land and property would be forced to pay high taxes to maintain it or release it to the taxpayer.

    • Mick

      What utter utter nonsense! Really it’s people that think idiotically like you that are the problem! The goverment are sterling more of people’s hard earned money that’s already been taxed several time over. Just to tax the again. It’s a redistribution of wealth from those that have worked hard and earned it and should be allowed to do what the hell they want with it to those lazy moronic lot who do what the goverment wan t and spend it on all kinds of rubish! It disgusts me knowing that I am forking our tens of thousands in tax every year knowing I’m basically finding the scum, iligal immigrants and single mothers with 10 more rat babies that go round making normal decent folks life miserable!

  2. Andrew Harrison

    Full circle – I remember working on the impact of the original IHT legislation back in 1975 – that did not have major loopholes – some exemptions but was fairly watertight – subsequent changes made the whole tax useless against the mega rich.
    Not sure how to square the circle of having an administratively simple tax, which can’t be sidestepped, raises useful amounts of revenue and doesn’t evict families in modest but eyewateringly expensive London properties.

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