No tax is popular - but is there a less popular tax than Inheritance Tax (IHT)?
Whether you think it’s unfair and should be cut, or whether you think its avoided by too many people who should be made to pay it, it seems we can all find something we don’t like about IHT.
Now a group of MPs has waded in with proposals that IHT rules be torn up completely and redrawn from scratch. The All-Party Parliamentary Group for Inheritance & Intergenerational Fairness said last week that IHT was now suffering from a ‘byzantine array’ of rules and exemptions which are confusing for those who have to pay the tax. Even for those who don’t have to pay, the rules can mean they have to notify the tax man of their financial affairs.
The group recommended that the system be replaced with something much simpler - a 10% tax on annual gifts above £30,000. If an estate worth more than £2m is passed on a 20% rate would apply and there would be a ‘death allowance’ set at a similar level to the current £325,000 nil-rate band - estates worth less than that would not be caught. Gifts made during life would no longer count against this death allowance.
It isn’t the first call to overhaul IHT. The Government’s own Office for Tax Simplification made similar recommendations last year. And it isn’t simply those who always call for lower taxes who can see the benefit of making things simpler. Paul Johnson, director of the Institute for Fiscal Studies, writes in The Times that the redistributive ethos of IHT remains more relevant today than ever - but then goes on to explain why the current rules ends up helping the very wealthy who can plan their affairs so as to avoid the tax completely. A simpler system - even if it means lowering the headline rates of tax - might end up netting the taxman just as much money because the rich have less incentive to avoid it.
Last year I wrote an article to explain which gifts you can make to family members without having to worry about IHT. There are rules for small gifts, rules for wedding gifts, rules for gifts to support children and rules for gifts that are made from income rather than a saved pot of wealth. Believe it or not, these are the allowances and exemptions designed to help ordinary people, not the mega-rich - the regime for more complicated tax arrangements gets even messier. If you hold enough wealth that it makes sense to buy farmland, or to change your residential status to ‘non-domiciled’ in the UK, you can reduce your IHT liability to practically nothing.
In any discussion about IHT, it’s always worth remembering that only a small minority of estates are caught. At the last count only 4.6% of estates were liable, although the total amount of money taken by the tax is rising and hit £5.4bn in 2018/19.
For those caught by the tax, however, it really matters. An inheritance might be a crucial part of a person's overall financial security. Wherever the level of the tax is set, the system needs to be simple enough that all can have confidence in it and be sure that that they won’t end up paying a much higher proportion than someone else.
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