In this world nothing can be said to be certain, except death and taxes. Inheritance tax of course combines the two. But is it time to scrap inheritance tax, replacing it with something fairer to families and harder for the wealthiest in society to avoid?
A new report from Resolution Foundation’s Intergenerational Commission believes the tax should be scrapped and replaced with a new form of inheritance tax, designed to be fairer and better enforced.
Their latest report, Passing on, has highlighted the growing importance of inheritances in shaping Britain over the coming decades.
They note that inheritances have doubled in the last 20 years, reaching a total of £100bn in the 2015/16 tax year, the latest year for which official statistics are available. If the forecasts are accurate, then total inheritances could double again during the next 20 years.
However, they claim rising inheritance wealth alone is not the answer to dealing with the big economic challenges faced by Britain in the decades ahead.
That’s because the current millennial generation are not expected to receive their inheritance until an average age of 61, making the transfer of wealth happen too late to get them onto the property ladder or provide financial support when raising children.
In fact, we would urge clients not to rely on an inheritance to support a long-term financial plan. With rising life expectancy, many parents are finding themselves unable to leave much wealth behind for the next generation, spending it instead on their lives in retirement and, sometimes, expensive residential care costs.
Resolution Foundation believe that inheritance tax, under its current structure, does a poor job of collecting tax for the state. It currently represents just 77p of every £100 raised in taxes nationally, with only 4% of estates in the UK paying any inheritance tax.
Suggesting some ways to bring inheritance tax into the modern age, the Foundation has called for it to be scrapped and replaced with a new Lifetime Receipts Tax.
This new form of inheritance tax would have a much lower rate than the current 40% tax applied on taxable estates in excess of the nil-rate band and other tax allowances.
Rather than taxing the deceased’s estate, a Lifetime Receipts Tax would tax those benefiting from an inheritance, but only on the amount of inheritance received above an agreed lifetime allowance. This approach would, according to the Foundation, encourage families to spread their wealth among different beneficiaries, as each child or grandchild would have their own lifetime allowance to use up.
Switching from a system which taxes the estate to one which taxes the receipt of an inheritance by a beneficiary could reduce the ability for wealthy individuals and couples to reduce their tax bills by making large lifetime gifts. Such gifts would also be captured by a Lifetime Receipts Tax.
Also proposed by the Foundation is a restriction on business property and agricultural reliefs, currently costing the Exchequer more than £1bn a year. These restrictions would be designed to restore the original purpose of such reliefs, helping genuine family business owners and farmers.
The report finally demonstrates that applying an allowance of £125,000 to a Lifetime Receipts Tax, with a 20p rate up to £500,000 of received inheritance, and 30p after that, would reduce the marginal rate of tax on wealth transfers but raise up to £11bn for the Exchequer in 2020/21. This compares with just £6bn forecast in 2020/21 under the current system.
Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said:
“Inheritances are already worth over £100bn a year, and their doubling over the next 20 years means they are going to play an even larger role in shaping British society. “But the current system of inheritance tax is not fit to deal with this societal shift. It currently manages the uniquely bad twin feat of being both wildly unpopular and raising very little revenue. “Rather than tweak our failed inheritance tax system, it should be scrapped altogether and replaced with a new Lifetime Receipts Tax. This new system would be fairer to families, harder to avoid and would ensure our tax system keeps up with 21st Century Britain.”
We often find that our clients fall into one of two camps when it comes to the emotive subject of inheritance tax.
Some will want to do everything possible to avoid their children and grandchildren from having to pay the tax. Others take the view that their kids will still inherit more than they ever did, after taxes have been paid, so there’s little purpose in working hard to avoid the tax.
Whatever view you take of inheritance tax, it’s well worth understanding how much tax your children and grandchildren could pay when you die, before exploring the various options for reducing this tax bill.