Inheritance Tax is enormously unpopular to say the least. A YouGov poll found that 59% of the public deemed it unfair, making it the least popular of Britain’s 11 major taxes. What’s more, the tax has a limited revenue raising ability, with the ‘well advised’ often using gifts, trusts, business property relief and agricultural relief to avoid paying so much.
As it stands, the tax affects just 4% of British estates and contributes only 77p of every £100 of total taxation. This puts the tax in the awkward position of being both highly unpopular and raising very little revenue. Currently the inheritance tax threshold stands at £325,000 per person. Anything above this is subject to a 40% tax (unless you leave everything above the threshold to your spouse, civil partner or charity).
If you own your own home and are leaving it your children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million, this can lift the threshold by an additional £125,000 in the 2018-19 tax year (the nil-rate band), to £450,000.
Inheritance Tax is seen as unfair for several reasons, the main one being because it is a tax on giving (while normal taxes apply to earnings) and it is a ‘double tax’ on people who have already earned – and been taxed on – their wealth.
In its report¹ dated May 2018 , The Resolution Foundation; a prominent independent think tank, set out an alternative. They proposed abolishing Inheritance Tax and replacing it with a Lifetime Receipts Tax.
This would see individuals given a Lifetime Receipts Allowance which would allow them to receive tax free gifts through their lifetime up to a set threshold. They would then have to pay tax on any gifts they received that exceeded this threshold. The thinktank suggests that by setting a lifetime limit of £125,000 and then applying tax at 20% up to £500,000 and 30% after that, this would be both a fairer system and harder to avoid. It would also encourage individuals to spread their wealth wider.
They predict that a lifetime receipts tax would raise an extra £5 billion by 2021, bringing in £11 billion rather than the £6 billion inheritance tax currently raises. In a time of mounting pressure on public services like the NHS, this additional revenue would be welcomed by many.
The Lifetime Receipts Allowance would also remove many of the current ways of managing the amount of assets an individual is taxed on upon death. For instance, people would not be able to reduce the size of their taxable estate by giving away liquid assets seven years prior to their death.
The Resolution Foundation also suggests tightening up on existing reliefs such as Business Property Relief, Agricultural Relief, the treatment of inherited pensions and the forgiveness of Capital Gains Tax at death to reduce the scope for tax avoidance.
The Lifetime Receipts Tax is only a think tank recommendation and is not being considered by the government but for the reasons stated … it could have legs.
The information provided is based upon the authors understanding of taxation and legislation at the time of writing. Any level and bases of, and reliefs from taxation are subject to change.