‘Capricious’ inheritance tax regime needs urgent reform

The triple lock for the state pension should be removed, better-off workers over state pension age should pay National Insurance contributions (NICs) while they continue to work, and the ‘capricious’ inheritance tax (IHT) regime must be overhauled, says House of Lords committee

The House of Lords committee on intergenerational fairness and provision has published a report on its inquiry into how the tax and benefits system could be reformed in the light of an ageing population. Among recommendations, it says the Treasury should include a distributional breakdown of the effects of each budget by age group, and should develop its capacity to model the generational effects of tax and benefits policies.

On benefits, the report says the government should seek to target existing age-related benefits better at individuals outside the workforce, and options such as free television licences for all over a certain age should be phased out.

Age thresholds should be raised. From 2026-28 when the state pension age is due to rise to 67, free bus passes and winter fuel payments should be available no sooner than five years after the state pension age and age thresholds should be aligned across benefits. The difference should be maintained from then on as the state pension age rises.

Alongside changing the age of applicability, the government should investigate the feasibility of treating these benefits as taxable income for those above the tax threshold without requiring individuals who currently do not complete an income tax form having to fill out a form.

The committee said the reality of longer working lives should prompt the government to rethink NICs, saying it is not fair that only individuals under the state pension age pay this tax.

 Individuals over the state pension age should contribute, with those on lower incomes protected  by aligning the NICs threshold for this group with the income tax personal allowance.

The report said there are strong arguments for the government to consider greater alignment and the eventual merger of the NICs and income tax systems.

It is also heavily critical of IHT, which is described as ‘capricious and not currently fit for purpose’. The report said consideration needs to be given to whether and how assets should be taxed on death or transfer in a way that ensures fairness between generations.

One option put before the committee was to have a capital receipts tax where gifts and inheritances are taxed as income received by the inheritor or giftee, although this would require careful recording of assets. Another alternative was to exempt some assets from IHT if they were given for the purchase of a first home by a family member.

In addition, the report noted: ‘Stamp duty has seriously distorted the housing market. The government should review the effect of stamp duty on the liquidity of the housing market and consider how stamp duty could be reformed to improve the housing choices and availability for young families.’

The committee said ‘it does not make sense to have a tax on transactions, introducing large amounts of friction into the housing market during a housing crisis’, with alternative suggestions including reduced stamp duty for those downsizing.

Lord True, chair of the committee, said: ‘We found that intergenerational bonds are still strong, and the evidence suggested both young and older people recognise the contribution the other makes and the challenges they face. However, there is a risk that those connections could be undermined if the government does not get a grip on key issues such as access to housing, secure employment and fairness in tax and benefits.’

Phil Hall, AAT head of public affairs and public policy, said: ‘The House of Lords Intergenerational Fairness Committee has published a thoughtful, well evidenced and rather hard hitting report that ties in very neatly with many of the recommendations AAT has been making in recent years, not least around reforms to stamp duty and IHT, and brining pensioner benefits into line with the state pension age.

‘Whilst many of the recommendations would deliver greater intergenerational fairness, they would deliver a range of other benefits too – from protecting taxpayers’ money, ensuring greater simplicity in the tax and benefits system and making sure that spending is better directed to those who really need it. Government should give very careful consideration to its recommendations.’

Tackling intergenerational unfairness report

Pat Sweet

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