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