The FT has noted this morning that:
A tax avoidance crackdown is set to turn the spotlight on previously undetected inheritance tax planning schemes, where HM Revenue & Customs suspects “substantial” sums are at risk.
HMRC is seeking to close loopholes that allow some tax avoidance ruses to escape detection, amid signs that scheme promoters are increasingly turning their attention to inheritance tax as tax planning in other areas becomes more difficult.
I do, of course, welcome a crackdown on inheritance tax avoidance. It is necessary. Inheritance tax losses already, according to HMRC, cost the UK at least £400 million a year, or at least 12% of the inheritance tax yield.
Actually, I would suggest that this estimate is a work of fiction, but not because of avoidance but because of evasion. Let's offer a simple example of why this might be the case.
Based on HMRC data for UK wealth, extrapolated from inheritance tax returns, the UK is worth about £3.5 trillion in all, or £4 trillion gross of mortgages, of which £2 trillion is housing. Now I know that was 2010 data, but in many parts of the country house prices have not changed much since then.
According to Land Registry data on housing the average UK house price is currently £172,011 and there are 19.3 million privately owned homes in the UK (4.3 million of them are let out). That makes £3.3 trillion for that one asset alone.
That difference is going to work through to the inheritance tax yield in the end (and yes, I know about the surviving spouse exemption - but we all die in the end - which is the basis on which the HMRC data works).
Something, somewhere is being seriously under-reported for inheritance tax and i suggest that it is evasion and not just avoidance in play here. As for the loss, if anything like £1.3 trillion of value is going missing from reported estates the under-declaration is going to be a lot more than £400 million a year, even given the time over which that value would have to be declared. It could run to billions a year.
We have a tax gap on inheritance tax for sure. But I suspect the government is looking at the wrong one. Evasion may be the game in town on this tax.
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While I have much sympathy with your basic supposition – that there is a huge tax gap with IHT, I don’t think it is fair to call it evasion, simply because avoidance is so simple, widespread and politically accepted, for example through the use of trusts or passing property well in advance of death (see Ed and David Miliband and their father for example).
IMO before any crackdown could really raise serious sums, the loopholes need to be closed, complete with all the attendant political consequences.
The whole thing needs to be reformed
IHT is like an honesty box tax
If I recall correctly, one of the very first concrete acts of the new 2010 cabinet concerned our tax treaties with Switzerland, with particular reference to the taxation of trusts.
I hear – without definite confirmation – that every man around the cabinet table was and is the beneficiary of family trusts affected by the treaty changes.
I do not doubt that they all acted in full and proper compliance with the law and the relevant codes of conduct covering any potential or actual conflicts of interest that may have arisen.
You may draw your own conclusions about the level of top-down political support that may exist for a reform of inheritance tax and the valuation of estates. Personally, I exoected a more effective campaign for the abolition of IHT.
I think your claim likely to be exaggerated
There were also women round the table
In other words, this comment seems far from factual
I hope you’re right: there is such a thing as too much cynicism.
On the other hand the Osborne family trade is tax planning, and I can’t quite bring myself to congratulate the Prime Minister in his choice of a Chancellor with skills so very relevant to the tasks of collecting taxes.
I do wonder whether it may not be better to remove dwellings from IHT and, rather than tax the transfer, have a proper level of wealth tax on residential property. The Annual Tax on Enveloped Dwellings seems a first step in that direction, and from what I understand, has raised significant amounts of money.
If you removed the land element from house prices (via a significant land value tax) the value of most houses would be well below the IHT threshold.
Richard,
Do you think that parents giving their home to their children more than 7 years before they die, and the children granting their parents a lifetime tenancy is abusive?
Yes
Of course it is
Gifts with reservation rules were clearly meant to stop such abuse
I can see the overseas territories and the crown dependencies shaking in there boots at this one the writing is on the wall
Would you care to put a rough estimate on the annual generational transfer of non-housing wealth between UK residents?
No
Not without a lot of thought….
Fair enough. That’s a question for an academic economist with the resources of an academic institution to hand, then: financial resources, research assistants, access to documents, and a willingness to put the numbers up to several years of acrimonious scrutiny…
…And still be a rough estimate, at best.
But it’s still an essential number, because our belief that society’s earned income is equal to or greater than the sum of dynastic wealth transfers may well be wrong. And if it’s wrong by an order of magnitude, our society is not and cannot be a democracy – whatever the labels, we would be an economy of peasants and hereditary noblemen, and the underlying power structures of our politics would adapt to that reality within a generation.
Inheritance tax matters.
Odd how the ONS has the average UK house priced at £260,000 as of April 2014.
http://www.ons.gov.uk/ons/rel/hpi/house-price-index/april-2014/info-hpi-comparison.html
So, perhaps it’s even worse than you think?
We also get discrepencies between offical stats for total number of dwellings.
http://www.ons.gov.uk/ons/rel/census/2011-census/detailed-characteristics-on-housing-for-local-authorities-in-england-and-wales/short-story-on-detailed-characteristics.html
https://www.gov.uk/government/statistical-data-sets/live-tables-on-dwelling-stock-including-vacants
The ONS is for England and Wales only. Private owner occupation = 15M
This excludes the population of Scotland 5.3m and N.Ireland 1.9M. So, a consevative 16.5 M owner occupiers.
BTW, the ONS has come in for critisim from the IPPR and Thomas Piketty for their methodology, which they say serverly underestimates property wealth at the top end.
Thanks
I did very quickly and erred on caution
Looks like too cautious
ONS is worthy of criticism in many ways – starting with an appalling website
The numbers on IHT are almost impossible to reconcile.
IHT itself raises slightly less than the TV licence fee (about £3 bn each).
Total wealth, £5 trillion net?
Time between inheritances, call it 40 years = £125 billion a year.
Reported to HMRC = half that £60 bn.
Bearing in mind how unequally wealth is distributed and how low the IHT threshold is, surely half that reported is liable to IHT?
£30 billion x 40% = £12 billion.
Better to scrap IHT and have more higher Council Tax bands (all the way to Z) or do it properly and have LVT. That’ll bring in £3 billion without breaking a sweat.
NB – Stamp Duty Land Tax might be an awful tax but it raises nearly three times as much as IHT, because although it is far from an annual tax, it is less ‘lumpy’ than IHT.
IHT is a tax that has reached its use by date