Should the inheritance tax, a tax which is paid from the assets you leave behind when you die, be scrapped or is it actually something we want to keep?
Opinions on this subject differ widely, so as part of this week’s Your Thoughts Lawyer monthly reached out to a number of experts in the field, but in the UK and beyond, to hear what they had to say.
Saul Zneimer, Financial Adviser, hbfs:
The most invidiousness thing about IHT is that your money is taxed twice. Any legitimately earned income or capital appreciation will have been taxed as its being made during a person’s lifetime. As a result an individual’s Estate is made up of assets that have already suffered tax. The idea that the State then takes 40% of it away after your death, instead of allowing you to do what you wish with your money, is not one that sits comfortably with me or with many other people.
There are strong utilitarian arguments too for abolishing IHT. Beneficiaries are likely to spend much of the money they receive, investing in businesses and so on, generating economic activity and making the money inherited work for them. An extra 40% is a lot of money to inject into the economy. There of course will then be a tax take for HMRC – based on the profits generated from these assets. Now that’s a good way for the State to share in the fruits of the Estate.
Paul Falvey, Tax Partner, BDO:
The argument about Inheritance Tax (IHT) has been going on almost since the tax was introduced. The ‘for’ camp argues that the tax prevents the over concentration of wealth in a small number of families which inhibits enterprise. Those ‘against’ object that IHT taxes wealth a second or even third time, they suggest that if it were abolished, wealth would cascade down generations and stimulate economic growth.
The redistribution argument is more persuasive if you distinguish between passive and active wealth. IHT does this with Business Property Relief, a significant relief from the tax for trading businesses which enables businesses to be passed on rather than being broken up or sold to pay IHT.
IHT is also redistributive by giving relief for charitable gifts, and allowing a reduction in the IHT rate for non-charitable gifts from 40% to 36% where at least 10% of the estate goes to charity, so that the deceased’s heirs also benefit.
Generally people are happier to see passive wealth taxed, except when it comes to their own home. This is an emotive subject, especially as for most people their house is by far their most important, or often their only significant asset. They perceive IHT as unfair even if they bought their home years ago and have benefitted from rising house prices. The ‘residence nil rate band’ introduced in Finance Act 2016 is an attempt to take family homes out of IHT, but it is complex and limits relief to those who have children. Increasing the ‘standard’ nil band would be far simpler and fairer.
A specific exemption for the home has been suggested, but this could further increase house prices and reduce people’s willingness to move. There are already concerns over the shortage of family homes and the concentration of property ownership in older generations. Property market flexibility could be improved if there were incentives to downsize and gift or spend the wealth released, making larger houses available to families. Transaction costs often put people off, so lower rates of SDLT for downsizers would be needed to achieve this. Levying IHT on homes can also help; often a home is sold to pay IHT or to make it easy to divide an inheritance amongst children. In short - there are no simple answers in the scrap it or keep it debate.
Catriona Torrance, Private Client Solicitor, Balfour+Manson:
Dealing with the practicalities of inheritance tax when winding up estates, we see the impact this tax has at ground level. People worry about IHT but have little understanding of it, which leads to misconceptions. On one hand, there’s a widely-held perception that the government will swoop in, take your hard-earned assets and leave precious little for your family; on the other hand, there’s an assumption you’re not ‘rich’ enough to pay it but that the truly ‘rich’ should be heavily taxed before their families benefit from inherited wealth. Where to draw the line causes consternation.
In the current economic and political climate, I don’t believe there is an appetite in the UK to scrap IHT, with pressure to set higher rates of tax on the wealthiest using various tax measures. The least well-off are already, for IHT purposes, exempt – if the value of the estate is less than the nil rate band, or everything is going to a spouse.
What we are seeing, though, is pressure from the middle brackets. With estates where the house value is the largest proportion of wealth, people often don’t feel ‘rich’ because their main asset is not liquid and not divisible. We are, in the UK, peculiarly attached to the notion of a ‘family home’ – despite demographics and reality not substantiating this. People are concerned to preserve the ‘family home’ for the next generation. The next generation, however, are likely to be in their 50s or 60s, and usually sell the house, only occasionally keeping it as a second home.
Recent changes to the nil rate band reflect this attempt to preserve the family home, but also reflect a distinct set of moral standards. You only get the maximum extra tax-free allowance if you marry and have children to whom you leave your house. Because these rules only apply in specific circumstances, to a specific asset, they are complex. This adds to the confusion and misconceptions surrounding IHT.
IHT is a tax that can be mitigated with proper planning and the reality is that less than 4% of all UK estates are liable to pay IHT. However, the more complex the rules become, the more likely it is that only the very wealthy will feel they can afford the professional advice required. If it is to be kept, there is a strong case for simplifying it.
Charles Hutton, Partner, Charles Russell Speechlys:
Inheritance tax (IHT) is probably the most emotive tax. Its pros and cons have been debated for decades. At present it is payable at 40% above £325,000 (£650,000 on the death of most widows, widowers or surviving civil partners). The main exemptions are for gifts to spouses or charity and for gifts made more than seven years before death. Certain agricultural and business assets qualify for relief.
In 2015/16 it raised £4.7 billion. It is paid by around 4% of estates.
The arguments in favour of keeping IHT are essentially that it one of the least painful ways of raising tax. It is a tax on a windfall and that in most cases the recipient will still be significantly better off even if they only receive 60% of the estate. Moreveover, allowing wealth to pass down the generations completely intact will, it is said, disincentivise certain people from work or being inventive.
On the other hand, it is a strong human urge to provide for one's children and IHT is a significant impediment to doing that. Many feel that they have paid plenty of tax during their lifetimes, not least on income and most gains. For the same estate to suffer a 40% charge a third time on death adds insult to injury. It is comparatively easy to mitigate, notably by giving assets away and then surviving seven years. This means that in practice it is, or at least is perceived to be, a tax unduly borne by middle England, by those who cannot afford to pass on a large proportion of their estates during their lifetime. As such, it is a tax on aspiration, much like the Labour party's ill-fated mansion tax. Even many people who are unlikely to have to pay it think it is unfair.
We are constantly hearing that the young will spend most of their adult life trying to pay off their student debts and will find it extremely difficult to get on the property ladder. Taxing inheritances heavily can only exacerbate this problem.
In my view, IHT should be retained, but in a modified form. The threshold has been frozen since 2009, and even prior to that failed to keep pace with house price inflation. It should be raised significantly, to, say, £750,000.
There is also scope for simplification. For example, an additional threshold for residences has recently been introduced, but the details are inordinately-complex and it does not apply to all estates. This should be abolished. Finally, the IHT treatment of life interest trusts should revert to the pre-2006 system whereby the life tenant was treated as owning the underlying capital for IHT purposes, rather than there being IHT charges every ten years.
Christine Thornley, Head of Wills, Trusts & Probate, Gorvins:
Inheritance tax is without doubt an unfair tax. You pay tax all your life and then you are taxed on what you leave after your death. There are a number of exemptions in place which are designed to ensure spouses and charities are not penalised and that businesses can continue to be run after a shareholder passes away but otherwise a 40% tax charge on any amount over the nil rate band is a high charge.
Inheritance tax was initially designed to tax the very rich but with rising house prices more and more estates end up paying inheritance tax. The very wealthy are able to minimise their liability through setting up trusts and investing in inheritance tax friendly products however those who are comfortable but not incredibly wealthy are often caught by this tax. The impact on their beneficiaries can be extensive and the thought of thousands of pounds of a parents/relatives hard earned money going to HMRC to cover this tax often leaves a bitter taste in that beneficiaries mouth.
Unfortunately however, I do think that it is a tax that will have to stay for the considerable future. To abolish inheritance tax will lead to a loss in revenue that will need to be replaced. To increase income tax, stamp duty, council tax or any of the other taxes that directly impact people during their own lifetimes seems even more unfair than making estates pay a tax on large estates post death. If there was a choice between paying more income tax and keeping inheritance tax, I would be fairly confident that most people would vote for keeping inheritance tax. Times are tough enough as they are without day to day taxes having to be increased to replace the revenue lost through abolishing inheritance tax.
Elizabeth Young, Partner and Head of the Private Client Team, Roythornes Solicitors:
Increasing the inheritance tax allowance to £1 million means it has been abolished for most estates, with the exception of the wealthiest who fail to seek out specialist planning advice in good time.
There are arguments for and against the abolition of inheritance tax, which seem to divide opinion.
Some describe it as a ‘Robin Hood’ tax which penalises those who have worked hard to provide a better future for their family and that it is unfair people who carefully save for their families’ security should be penalised by paying a slice of their inheritance to the government, having paid income tax all their lives.
It is also considered an overly complex regime that favours those who are able to take advice and plan their estate in advance. With people being taxed throughout their life on their income and capital gains, being charged on the amount they leave behind for loved ones when they die is one step too far for many.
An alternative, perhaps fairer tax system, but not an easy one to administer might be to tax individuals at progressive rates on the total amount of gifts and inheritances they receive over their lifetime - or extending the reach of the tax to gifts made more than seven years before death, for example to 15 years.
Elizabeth Young, Partner and Head of the Private Client Team, Roythornes Solicitors:
Increasing the inheritance tax allowance to £1 million means it has been abolished for most estates, with the exception of the wealthiest who fail to seek out specialist planning advice in good time.
There are arguments for and against the abolition of inheritance tax, which seem to divide opinion.
Some describe it as a ‘Robin Hood’ tax which penalises those who have worked hard to provide a better future for their family and that it is unfair people who carefully save for their families’ security should be penalised by paying a slice of their inheritance to the government, having paid income tax all their lives.
It is also considered an overly complex regime that favours those who are able to take advice and plan their estate in advance. With people being taxed throughout their life on their income and capital gains, being charged on the amount they leave behind for loved ones when they die is one step too far for many.
An alternative, perhaps fairer tax system, but not an easy one to administer might be to tax individuals at progressive rates on the total amount of gifts and inheritances they receive over their lifetime - or extending the reach of the tax to gifts made more than seven years before death, for example to 15 years.
Beverley Jenkinson, Assistant Solicitor, QualitySolicitors Howlett Clarke:
The question of whether or not Inheritance tax (IHT) should be scrapped is an emotive subject. Those in Government will no doubt look at the Office for Budget Responsibility who forecast IHT to rise to £5 billion in 2017-18. This is equivalent to 0.2 per cent of national income. On a percentage basis, it does not seem very much (in Government terms anyway) but why would the Government scrap an easy and assured way of collecting revenue in austere times?
For individuals though, one of the most popular arguments for scrapping IHT is that they have paid tax throughout their lives (via income tax, capital gains tax and VAT etc.) so why should their estates be taxed again on death?
IHT is charged on net estates worth more than £325,000 (after deducting any liabilities, exemptions and reliefs). This £325,000 is known as the nil-rate band (NRB). For couples this rises to £650,000 as the NRB is transferable between spouses and civil partners but not cohabitees. In addition to this, since 6th April 2017 estates will be entitled to the residence nil rate band (RNRB) if on death they own a home/share of one which is left to “direct descendants”. Thereafter IHT is charged at 40%. This will mean that by 2020-21 married couples/civil partners would need to have collective estates worth over £1m before IHT becomes chargeable as each spouse/civil partner will have their own NRB plus a RNRB of around £175,000.
Some may argue that many estates will not be affected by IHT as their value is below the aggregate value of the NRB and RNRB. However, with property prices continuing to rise, it seems likely that an increasing number of estates will have to pay IHT.
In the spirit of fairness, surely consideration should be given to reducing the rate of Inheritance Tax and tapering the percentage according to the value of the estate. This would keep IHT in line with other taxes such as income tax and capital gains tax. In addition, there should be similar IHT reliefs available for cohabitees as there are for spouses/civil partners.
So we say – let’s keep it but tweak the provisions to make it fairer for all. Besides, in our soon to be post-Brexit Society the Government will no doubt need as much financial support as possible!
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
