Independent British think tank the Resolution Foundation, has started a nationwide discussion after proposing that inheritance tax be scrapped and replaced with a lifetime receipts tax.
Its report titled Passing On, suggests that such a reform would be fairer and harder to avoid, pointing to the growing value and importance of inheritances which have doubled over the last 20 years - hitting over £100 billion in 2015/2016 - and forecast to double again over the next two decades as wealth is passed on through families. The proposed changes would simplify the system of taxation on gifts (in lifetime and on death) while increasing overall tax revenue, argues the Resolution Foundation.
An unfair system?
According to a YouGov poll conducted in 2015, 59% of the public felt inheritance tax was unfair and no formal polling or anecdotal evidence gathered recently suggests that opinion has changed. This is despite the tax being imposed only on the largest 4% of estates, and contributing only 77p for every £100 of the tax take. It is thought the tax's perception as a tax on the dead ultimately leads to its unpopularity.
Adam Corlett, senior economic analyst at the Resolution Foundation, sums up the current system, saying that "it manages the uniquely bad twin feat of being both wildly unpopular and raising very little revenue".
Other opponents of inheritance tax highlight the fact that the nil rate band threshold of £325,000 per person has remained constant since 2009/2010, despite a rise in house prices and inflation. They point out that while the total gross take may not be huge in terms of overall tax receipts, this failure to increase the threshold has nonetheless led to an increase in inheritance tax raised from £2.4 billion to £4.8 billion over the same period.
Easing the burden?
Recent changes in legislation and the introduction of the residence nil rate band will arguably reduce the burden of inheritance tax for the average family, including those with houses in the South East of the country, increasing the overall nil rate amount for a married couple with children up to £1 million by the 2020/21 tax year (subject to certain qualifying criteria).
The benefit of this additional nil rate band is tapered for estates valued in excess of £2 million, potentially helping redress the balance and fairness of the impact of inheritance tax. It is difficult to fully assess the impact of this additional allowance, which has doubtless increased complexity.
The Resolution Foundation takes the view that the main unfairness in taxing an inheritance is down to the perceived ability of the rich and well-advised to avoid tax. In its report, it warns that inheritance tax is too easy to avoid through the use of trusts, business property relief and agricultural relief - exemptions which it is claimed are widely abused.
While these exemptions and allowances are available to all individuals, subject to affordability, other allowances are available which may be of greater benefit and are more likely accessible to those whose estates are only just valuable enough to incur an inheritance tax liability.
What is the proposed alternative?
The Resolution Foundation proposes that inheritance tax should be replaced with a lifetime receipts tax, giving individuals a lifetime receipts allowance of £125,000. This would be in addition to a basic inheritance tax set at 20% for the first £500,000 of an estate, with a rate of 30% applying to any value in excess of £500,000.
The Passing On report suggests that this arrangement would be fairer, although it is acknowledged that it is likely to raise extra revenue for the Treasury. It is predicted that if this system were to be adopted in 2020/2021 it would bring in an estimated £11 billion compared to the currently projected £6 billion for that tax year. The proposed tax further aims to remove the opportunity for individuals to avoid tax by giving away liquid assets more than seven years before their death and would put in place restrictions on business property relief and agricultural relief by capping the amount that can be received and increasing the qualifying minimum ownership period.
Furthermore, the proposed tax would work to shed the perception of inheritance tax as a death tax by imposing levies on the beneficiaries of an inheritance through the tracking of cumulative receipts, excluding gifts of £3,000 or less and transfers to spouses and charities.
The Office of Tax Simplification (OTS) has launched a call to gather information from taxpayers and professionals about their experiences and perceptions of inheritance tax. This session will close on 8 June and may be used to reform the inheritance tax system with a final report expected in autumn this year.
In the meantime.
. In recent years, successive governments have introduced legislation to further reduce tax avoidance. We recommend that all individuals seek professional advice before making large gifts or entering into any arrangements with the hope of reducing a potential inheritance tax liability.
While trusts are seen by many as a tool for tax avoidance, it is important to note the many non-tax benefits of such structures. Trusts are often used as a means to protect the vulnerable and to prevent depletion of assets in the event of outside risks (divorce, bankruptcy, influence of third parties).
When considering action to reduce inheritance tax, it is important to assess first whether there is a tax liability at all. Subsequently, it is advisable to review aims / motivations, considering the impact of other taxes and all other potential consequences before taking any action to reduce the value of an individual's estate.
The Passing On report was published on 02 May 2018 for the Intergenerational Commission,