The Brexit Party has suggested that inheritance tax should be abolished.
Inheritance tax is charged almost entirely on death. It is usually charged at 40% on the value of the estates of deceased people that exceed ££325,000. However, there are generous allowances. All gifts made seven years before death are exempted, as are gifts to spouses and civil partners. Much business property is exempt, as is most agricultural property and gifts to charity[i]. Arrangements for trust are complex but can still be beneficial. The result is that the £325,000 limit is decidedly flexible, especially when it now comes to housing, and latest data says 4.6% of UK estates, or 28,100 cases a year, pay inheritance tax[ii]. The tax collects about £5.4 billion a year[iii].
The strengths of the tax
It is the UK's only really effective tax on wealth itself. Wealth inequality is increasing rapidly in the UK. Around the world it is seen as a major issue. Organisations such as the International Monetary Fund[iv], World Bank[v] and Organisation for Economic Cooperation and Development[vi], none of which are seen as hotbeds of socialism, suggest that taxes are required to address this issue and create more equal societies.
More equal societies tend to be more socially and politically harmonious than unequal ones.
They also tend to be more prosperous and see more economic growth as those with lower wealth (and incomes) spend more of what they have, and so turn a given level of income into greater economic activity than do unequal ones.
Unequal societies also tend to take fewer risks. The wealthy tend to invest to preserve their wealth rather than take risk: there is little evidence that wealth supports real entrepreneurial activity or even investment. They prefer to save in cash, property and the share capital or already established companies.
Inheritance tax tackles these issues by redistributing wealth.
The weaknesses of the tax
Few estates pay the tax. The wealthiest tend not to because there are so many loopholes that they can exploit. Many who do pay do so because of the value of their family homes which the deceased have lived in until the time of death. As such the tax is not well targeted. That, however, is because reliefs may exempt a large part of the potential yield.
Why abolish the tax?
Inheritance tax seeks to do an essential job in the UK tax system by charging wealth to tax. The UK needs a wealth tax if the gross inequalities that our market system has given rise to, usually by chance, are to be addressed through the tax system as the organisations noted previously think essential. The problem with the tax is that it is ineffective. It only collects £5.4 billion a year.
The best reason for abolishing the tax is that it is not good at what it is meant to do. Ineffective taxes are always unpopular, as are those that appear to have a random impact.
What could replace inheritance tax?
Because it collects relatively little money there are a great many options for replacing inheritance tax.
The most effective, and fairest, would be to tax all receipts of gifts during a person's lifetime. This would discourage the concentration of wealth and instead of charging the dying — who could then give to whomsoever they wanted — would charge the living to reduce inequality. Few doubt that this is the best long term direction of travel.
In the short term some simple changes would, however, also be very effective.
First, there could be bands of tax due: a single rate makes little sense. If the other changes noted below were enacted this would have little impact on yield and make the tax more acceptable.
Second, the exemptions for business and agricultural property could be restricted. At present they cover a very wide range of assets and are open to abuse.
Third, houses could be exempted but be subject to capital gains tax on death instead. This would require that tax only be due on the death of a second owner in the case of jointly owned property, and that gains during the whole of life and not just in the final property be taken into account, but this should present very few problems in the vast majority of cases. This means only the gains arising on houses would be taxed, removing a major grievance.
Fourth, trust taxation need to be reviewed again to break up the concentration of wealth.
Should inheritance tax be replaced then?
In a word, no, it should not be. But it does need significant reform to make it substantially fairer. That might even require that it be given a new name. But the UK needs a wealth tax and the Brexit Party is completely wrong to suggest we should do without one. Most especially that is because that is not in the interests of most of those who voted for Brexit, who will never pay this tax.
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[i] These reliefs are together worth more than £4bn a year on average https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/832126/IHT_Commentary.pdf
[ii] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/832126/IHT_Commentary.pdf
[iii] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/832126/IHT_Commentary.pdf
[iv] https://blogs.imf.org/2017/12/07/chart-of-the-week-sharing-the-wealth-inequality-and-who-owns-what/
[v] https://www.worldbank.org/en/news/press-release/2018/01/30/world-bank-report-finds-rise-in-global-wealth-but-inequality-persists
[vi] https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=SDD/DOC(2018)1&docLanguage=En
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The biggest problem with taxing gifts is the difficulty in collecting it. People would just not declare it. Also at what level is a gift a gift. If a parent gives a child money to go out or to pay for rent at University because they have run out of money would all that need to be declared?
Inheritance tax as it stands does create an event that the tax authorities can expect to be notified about and thus collect some tax. The reason the tax doesn’t generate much revenue is that most people who die do not have substantial assets save perhaps their home if they lived in the south east or London. A capital gains tax for housing on death would be avoided by selling before death and purchasing a cheaper dwelling. As you say inheritance tax avoidance is rife especially for those with substantial assets and I fear that avoidance would continue whatever the system of collection.
Another observation – it is strange that people, often well off, begrudge people receiving even a modicum of state benefit to get by as being undeserving and unearned but when it comes to rich people inheriting large amounts untaxed and unearned it is viewed as a god given right that this can be passed on without any penalty. Weird world. Benefits I believe are taxable as are pensions. Maybe inheritance should just be treated as income on receipt and taxed accordingly.
The biggest problem with the UK’s “Inheritance Tax” is that it is not an inheritance tax. It is merely George Osborn’s renaming of Death Duties. ( A precedent for his renaming of the Minimum Wage to pretend it was something it patently was not.)
Inheritance Tax should be taxed as income for the recipient(s), and according to the recipients circumstances.
Completely agree about treating it the same as income tax..
The perception and often quoted line is that “people pay tax on their income all their life, then they get taxed again when they die”, when in reality it is the beneficiary who is essentially paying the tax, having not ‘earned’ it.
And again, with regards to the recipients circumstances, that would also be proportionally more fair – it seems so simple, what is the catch?!
The Capital Transfer Tax Act was passed in 1984, replacing similar legislation passed in 1974 and 1975 to replace estate duty (which we had since 1894, and before then various taxes on death or gifts since the 1690s). The capital transfer tax was renamed “inheritance tax” by the Finance Act 1986.
I’m not sure why George Osborne is implicated in any of that: he did not become an MP until 2001.
Clearly we need an effective tax on wealth, to go alongside taxes on income and gains, and taxes on transactions. I’m not at all convinced that our current 40% inheritance tax is the right way to go about it though.
Andrew,
Thank you for correcting me. I do not know how I became so completely misinformed. Now I know that it was Nigel Lawson responsible for the misleading name.
This is a complicated area without a doubt. personally feel it should be set around the price of an average family home (per child), after that taxed on an ability to pay basis, a means test for the rich based on full disclosure of assets at home (or offshore) with very heavy penalties including imprisonment and seizure of assets for false declarations. Zero tolerance for tax cheats.
I am wondering whether my children will be taxed on their Birthday and Christmas presents, or indeed if I bring them back a T shirt or other ‘gift’ from the shops will that be considered ‘taxable’?
This would probably be the most unworkable and unpopular suggestion (across all society) you have ever made.
And now you’re just being silly
And you know it
I actually wasn’t being silly it was a serious question..where is the cut off and how is to be enforced?
I can’t see any tax being due until cumulative receipts reach at least £100,000
But that’s just a suggestion
But Richard if we’re monitoring cumulative receipts then we do have to monitor these small gifts in kind. Otherwise very expensive gifts (eg Rolex watches) could be a way of avoiding tax.
Yes, of course
“More equal societies tend to be more socially and politically harmonious than unequal ones”…
… Well the poorest country in the world (using GDP as the measure) is the African nation of Burundi. There 82% of the population lives on $1.25 a day or less and 90% of the Burundian population rely on agriculture. Lots of equality there, but not much in the way of social or political harmony (the Hutu-Tutsi ethnic conflict, a civil war and the odd failed coup). Nor much in the way of economic growth, either.
You know you are being fatuous
Why waste your time being stupid?
It’s the name that does it for me:
‘Inheritance’ implies someone has died? Why wait until a death which is not the nicest of things to endure even for the very wealthy? Why wait for something to happen before applying a tax (with the exception of transactions)?
What is needed is a tax solution that taxes wealth whilst they are alive – not as they die.
Richard,
It seems to me that unpicking a lifetimes worth of property transactions, especially as the executors/family may not be aware of all of them, properties might not have been registered, divorce, etc etc is to say the least of it messy.
It seems to me however that CGT on all property transactions from a certain date would be fairly simple to administer.
I suggest that a political commitment to zero house price inflation, & improvement to the land registry so each ‘owner’ has an account with all their property interests
Oh come on….most people do not move that often in a lifetime
I dont necessarily disagree with you, but…………..
I married relatively late in life & was fortunate enough yo buy a house quite young in the mid 80’s
If my brothers were to predecease me, my wife & sons have no idea as to which house it is
With my late mothers estate the house she owned when she married wasnt registered, neither was the family home at the time of my fathers death
But if you knew you had to do this you’d leave all the data, wouldn’t you?
And every solicitor would ask for it to be done when preparing wills