Inheritance Tax  

Simplify inheritance tax this Budget

Rachael Griffin

Rachael Griffin

Inheritance tax (IHT) is one the UK’s most unpopular taxes.

A YouGov poll once found it was rated the least ‘fair’ personal tax, compared to the other levies we pay for things like stamp duty, national Insurance, income tax and tobacco duties.

It penalises our desire to bequeath wealth to our offspring, and opponents also criticise it as a form of double taxation, arguing that once the state has taken a slice in the form of income tax, personal choice should dictate who inherits your wealth.

Governments are generally not inclined to make more people pay such an unpopular levy.

Indeed, although guilty of suspect implementation, the government sought to extend exemption from IHT in 2017 through the Residence Nil Rate Band.

In recent weeks, however, the All Party Parliamentary Group on Inheritance and Intergenerational Fairness proposed an overhaul of the system.

Its aim is not to reduce the impact of IHT, but instead to make taxes on wealth transfer harder to avoid.

The report noted that IHT is often referred to as ‘voluntary’ because of the reliefs and exemptions that exist.

According to the APPG’s findings, the wealthier the family, the easier it is to make use of gifting to mitigate IHT.

It says the largest estates pay on average 10 per cent in death duties, while those with more modest wealth pay an average of 20 per cent.

And it says the system can be most punishing for middle class homeowners, who have the majority of their wealth tied up in their primary home which cannot be readily gifted.

The report says it would be fairer to apply a flat rate tax of between 10 per cent to 20 per cent on any money and assets gifted during someone’s lifetime, with the same rate of tax applicable to their estate on death.

The only exemptions would be a £30,000 annual allowance for gifts and a £325,000 death allowance, with no tax payable under these thresholds.

The APPG argues there are a number of advantages associated with the proposal, several of which could appeal to the Chancellor and his advisers.

By flattening the headline rate of IHT to just 10 per cent, the policy could alleviate concerns among mass affluent homeowners that decades spent paying off the mortgage will be punished with a 40 per cent tax rate on death.

The changes could also be badged as a tax simplification measure, which is popular with voters.

IHT itself is in fact very simple: a flat rate tax of 40 per cent above an inflation-linked threshold.

However, the high headline level rate has led the Treasury to gradually introduce multiple avenues through which individuals can gain relief.

The end result is that people view estate planning as an overwhelmingly complex exercise.