Call to scrap IHT for ‘lifetime receipts tax’

Inheritance tax (IHT) should be scrapped and replaced with a new ‘lifetime receipts tax’ of £125,000 per person coupled with a much lower rate, to smooth out intergenerational financial imbalances, according to analysis from the Resolution Foundation

The think tank says inheritances have doubled over the last 20 years – hitting over £100bn in 2015/16 – and are forecast to double again over the next two decades as record levels of wealth are passed on through families.

However, while the increase will benefit many millennials, the Foundation warns that inheritances will not be able to deal with the current economic challenges facing families because the most common age at which the current millennial generation are expected to inherit is 61 – far too late to help with buying a home or bringing up children.

At the same time, the report argues the present IHT regime is highly unpopular because the high margin rate of 40% makes it appear to be an unfair tax on the dead.  The foundation says it also does a poor job of collecting revenue. It accounts for just 77p of every £100 raised nationally, and just 4% of estates are now subject to it.

The proposed new lifetime receipts tax would apply to those benefiting from any inheritances, rather than being charged on the deceased’s estate, and only for any inheritances beyond a lifetime allowance. All lifetime gifts would be included in the tax, excluding those of £3,000 or less, but transfers between spouses would be exempt.

The report suggests that applying an allowance of £125,000 to a lifetime receipts tax, followed by a 20% rate up to £500,000 and 30% after that, would reduce the marginal rate of tax on wealth transfers significantly while still raising up to £11bn in 2020-21 (compared to the £6bn that the current system is projected to raise).

The think tank says this would have the added benefit of encouraging families to spread their wealth, as each beneficiary would have their own tax allowance.

The report adds that this new approach would significantly reduce the scope for the very rich to reduce their tax bills by making large gifts well before passing away, something ordinary families whose assets are largely tied up in a house are unable to do.

It also sets out proposals to restrict business property and agricultural reliefs (which together cost the Exchequer over £1bn a year) to their original purpose of helping genuine family businesses and farmers by introducing a so-called ‘farmer test’. This test is already in place in Ireland and France, and requires that the assets being passed on are at least 80% agricultural property.

Pensions pots which are inherited if someone dies before turning 75 are exempt from tax. The report suggests that this be removed. It also called for the scrapping of the forgiveness of capital gains tax when someone dies. This tax-break will cost £1.2bn in the financial year 2018-19, the report claimed.

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.’

The Office for Tax Simplification has recently announced a review of IHT with a view to simplifying the processes involved.

Passing On: options for reforming inheritance taxation is here.

Report by Pat Sweet

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