Is IHT an unfair tax?

With the IHT threshold frozen until the 2027-28 tax year, it is widely expected that HM Revenue & Customs will continue to see record growth over the coming years as inflation and sound financial planning drives the growth of estates.

As reported by FTAdviser: “Some have forecast this could net the government more than £1bn, with the average IHT bill reaching £304,567 by 2025-26 and £345,084 by 2027-28, according to research by Wealth Club.”

The social and economic quandary across the political divide is whether IHT is an appropriate and ‘fair’ tax, making this a potentially philosophical conversation.

As always, there are arguments in favour of and against IHT, with the former suggesting that inherited wealth is in itself unfair and the latter suggesting that those who have accumulated wealth should be able to bequeath it to whomever they wish.

Is IHT preventing large-scale transfers of wealth or is it potentially taking money out of circulation that stifles economic productivity? 

Let’s first consider the viewpoint that inheriting wealth is an unfair action. The argument here is fairly straightforward: inherited wealth is discriminatory as it provides an unfair advantage. Following this logic, everyone is born equally and, therefore, should make their own way in the world.

The pro-IHT stance also argues that accumulated wealth should be shared for the greater good, making it a moral obligation as well as a fiscal tool.

Seeing as the UK government collects more than £5bn of IHT receipts each year, it is understandable why government would find this opportunity to collect tax appealing. It is also understandable that some would find it appealing to use such wealth to support systems like the NHS, social care and our armed forces. 

Additionally, there is the argument that inherited wealth stifles innovation and productivity for the receiving generation. Entrepreneurs like Bill Gates, Mark Zuckerberg and Simon Cowell, for example, have publicly stated that they do not intend to pass their fortunes on to their children to avoid distorting their lives and careers (though doubtful they will be left penniless).

IHT is ultimately voluntary – there are many opportunities for individuals to reduce their IHT liability. 

Those against IHT argue that they paid tax on their income, as well as their spending, and are now unfairly having their hard-earned wealth taxed a third time upon death. 

The argument here is that someone who has worked hard to build their wealth and/or afford a nice home should be able to pass it on to their children or whomever they wish. The government partially addressed the issue of property in 2015 with the introduction of the resident nil rate band, meaning that a married couples’ estate – if it includes their residential property – can be worth up to £1mn before IHT becomes applicable.

Analysis of the UK’s IHT receipts suggests that the middle classes contribute to the majority of IHT receipts. This begs the question: is IHT preventing large-scale transfers of wealth or is it potentially taking money out of circulation that, according to Keynesian economic principles,  stifles economic productivity? 

IHT is a complex subject that will continue to be a point of debate for generations to come. And while there are merits in all of the above arguments, IHT is ultimately voluntary – there are many opportunities for individuals to reduce their IHT liability. 

Compared to other IHT planning tools, BR propositions are extremely straightforward.

One such opportunity is the use of business relief. By investing in BR-qualifying propositions, individuals can protect wealth for their beneficiaries while benefiting the greater good by providing tangible social benefits. For example, certain BR propositions invest in renewable energy, lease assets to public organisations like the NHS or support SME growth. 

One can assume that most individuals want the next generation to live in a clean world powered by renewable energy, while also ensuring their children and/or grandchildren can benefit from their inherited wealth.

Compared to other IHT planning tools, BR propositions are extremely straightforward, with the individual maintaining ownership of the assets and the assets being exempt from IHT after two years of holding (rather than the traditional seven years provided by other estate planning tools), as long as the assets are still held on death.

As long as individuals receive appropriate estate planning advice, IHT is a voluntary tax that can help achieve positive social change. Rather than being unfair, IHT therefore represents a significant opportunity for financial advisers and individuals alike.

Andrew Aldridge is chief marketing officer at Deepbridge Capital 

(Photo by FT Montage)