As the Treasury-backed Office of Tax Simplification seeks the public’s view on how best to reform inheritance tax, a think tank has come up with its own solution.
The Resolution Foundation says death duty is the “least fair tax” of any in the country and should be replaced by a tax on those inheriting the money.
Adam Corlett, its senior economic analyst, said: “This new system would be fairer on families, harder to avoid and would ensure our tax system keeps up with 21st Century Britain.”
So, how does the current system work?
At the moment, inheritance tax is paid on someone’s entire estate after they die.
Their descendants must pay 40 per cent of the value of the estate over a threshold currently set at £650,000 for married couples or registered civil partners. With the additional residential allowance, this figure can be up to £900,000 for the current tax year where property is left to people closely related to you.
What’s wrong with that?
According to the Resolution Foundation, not only are a mere four per cent of estates currently subject to inheritance tax but rich people able to afford legal advisors are able to mitigate tax paid by doing things like passing on their wealth to children more than seven years before they die and tying it up in business and agricultural land which get special relief.
And the average age people tend to inherit is 61 – usually too late to be useful to buy a property or bring up a family, it claims.
What does the Resolution Foundation propose?
It thinks people should be taxed on all the wealth they receive over their lifetime.
This system, called the ‘Lifetime Receipts Tax’, would give everyone a £125,000 tax-free allowance, followed by a 20 per cent rate up to £500,000 and 30 per cent after that.
It says this would result in more people paying, but they’d all be paying less and would mean there would be no benefit in passing on wealth long before or after death.
Why is inheritance tax being reviewed?
Recent figures show families paid more than £5 billion in death duties in the 2017-18 tax year, the highest on record, as rising property prices pushed an increasing number of estates into the inheritance tax bracket.
Opponents believe inheritance tax should be abolished, accusing it of being a tax on assets that have already been taxed and maintaining that people should be free to leave their assets to whoever they want without fear of being taxed again.
Chancellor Philip Hammond ordered a sweeping review of inheritance tax earlier this year amid claims that it is complicated, confusing and possibly causing ‘distortions to taxpayer decisions.’
The Office of Tax Simplification, an independent arm of the Treasury, is carrying out the review looking at everything from submitting returns and paying tax, to making IHT-free gifts and estate planning.
It will publish its report this Autumn.
See our recent blog article: Could the latest Inheritance Tax review ultimately help you and your family? for more information
For help, advice and guidance on this complicated area of the law please contact Wards Solicitors’ Wills, Probate and Mental Capacity team by phone or pop into one of our 11 local offices.