Is scrapping Inheritance Tax a good idea? This has been a subject of hot debate in recent years.
Inheritance Tax in the UK has long been the target of criticism from many sections of society. A recent YouGov poll revealed that only 20% felt this form of taxation was fair, lagging far behind levels for National Insurance contributions at almost 60%. This suggests an overall dissatisfaction with the current system and a lack of consensus over how it should be improved. Amongst complaints are the ease with which the tax can be avoided due to certain exemptions, such as those relating to gifts made more than seven years prior to death, leading some to advocate for further expansion, while others suggest abolition.
Despite a relatively small percentage of estates being liable to pay this tax, it raises a considerable amount of money for the government exchequer each year. There have been growing calls to abolish inheritance tax entirely; most recently by PM Rishi Sunak. This article seeks to provide an overview of the current regime, arguments in favour and against scrapping Inheritance Tax, and potential implications.
Inheritance Tax: How Does it Work?
Inheritance Tax is a policy utilised by the United Kingdom to collect revenue from taxpayers that receive money or property when someone dies. It’s applied to an individual’s estate, which consists of any money, possessions, and property left behind. This tax is imposed on the person receiving the estate, depending on how much is received at the time of inheritance.
Inheritance Tax is variable and generally starts at 40%. Properties, as well as investments and cash, are among the items that may be liable to Inheritance Tax. Despite the general assumption that everyone must pay Inheritance Tax when someone dies, it’s worth noting that married couples and civil partners are able to shelter up to £1million from Inheritance Tax as their combined allowances add up. In fact, according to current statistics, only 1 in 20 estates will be subject to Inheritance Tax liability.
It’s important to remember that any income or capital gains already subject to taxes such as National Insurance contributions may still be included in the calculation for Inheritance Tax even if this has already been paid. Also, assets gifted before death can also attract Inheritance Tax depending on how long before death they were given away and if certain exemptions apply.
The residence nil-rate band means that in many cases the threshold of Inheritance Tax liability is much higher than £325,000. This applies to those with family homes — such as a child or grandchild — even if they are not necessarily residing at the property and it may provide considerable financial benefit in terms of minimising taxation liabilities. In certain circumstances inheritance tax can be due 7 years after gifts have been made directly by the gifter before they passed away; so it is important to ensure there is rigorous planning in place ahead of time.
Why Scrap Inheritance Tax?
Liz Truss recently argued that Inheritance Tax is possibly the most complex tax system in existence and imposes a disproportionate burden on middle-income families.
Many people feel that Inheritance Tax punishes a person financially for having life achievements, such as owning properties and businesses, and that it is their property to pass on as they please. Indeed, the impact of Inheritance Tax can be large, with families having to pay up to 40% of their assets as tax – and this is after tax was paid on the money when it was first earned.
With this in mind, a growing number of people oppose such a tax, especially those who are bereaved suddenly due to an unexpected illness or other circumstance. In such cases, these already vulnerable people are then hit by this additional taxation, which limits financial security in their time of need.
Similarly, healthy people have more time to plan and invest prior to death in order to avoid the same IHT payment – creating what some believe is an unfair situation. For these reasons, one could argue that it’s understandable why many are campaigning for the complete abolition of Inheritance Tax.
The government faces increasing pressure to scrap Inheritance Tax due to the growing sense of unfairness surrounding it. Paul Johnson from the Institute for Fiscal Studies has also publicly endorsed the idea for reform, commenting that the current system “is genuinely unfair”.
It could be argued that scrapping Inheritance Tax entirely would ultimately benefit everyone in society, by reducing wealth inequality between generations, as well as helping people save money on future tax costs when transferring assets from one generation to the next. This could potentially increase consumer confidence and boost economic growth due to increased investment in business ventures.
Scrapping Inheritance Tax: Potential Implications
An argument in favour of Inheritance Tax surrounds helping to ensure that assets are redistributed from wealthier families and individuals to those who need it most, thus providing increased economic opportunities for those who would otherwise have limited access. This argument ultimately seeks to increase the fairness within an unequal society, ensuring that those with more resources do not use them as a means of furthering their own financial gain while leaving others behind.
Currently, IHT generates approximately £5 billion in revenue for the UK Treasury. This amount of money would be difficult to replace and could result in additional austerity measures or increases in other taxes, such as income tax or capital gains tax. Additionally, it is worth noting that only 4% of estates are subject to any form of Inheritance Tax, as the majority are exempt due to small estate sizes. Thus, while it is important to make the system simpler and fairer, completely eliminating it may be financially imprudent and irresponsible.
The aim behind changing or altering Inheritance Tax laws seems to cater for those with smaller estates, where death taxes can be a significant burden on top of various associated costs such as funeral expenses. Therefore, if changes are made which make it easier for people with lower-value estates to benefit without paying Inheritance Tax, this could be extremely beneficial to these families.
Ultimately, scrapping Inheritance Tax entirely could potentially have both positive and negative implications, depending on the specifics of any proposed changes. Although some view it as an unfair tax, given its complexity and exemptions, it is important to consider the possible consequences of scrapping Inheritance Tax altogether in order to ensure that the system remains fair and equitable for all.
Conclusion
The debate surrounding scrapping Inheritance Tax in the United Kingdom is characterised by a complex interplay of arguments, each with its merits and drawbacks. While the tax system is criticised for its complexity, its perceived unfairness, and its potential negative impact on middle-income families, it also plays a role in wealth redistribution and contributes significantly to government revenue.
The call to abolish Inheritance Tax entirely raises potentially valid concerns about its intricacies and the burdens it places on certain individuals. However, the implications of such a move must be carefully considered. The loss of £5 billion in annual revenue could necessitate alternative measures, such as austerity measures or tax increases, which may have their own consequences on the economy and society.
Ultimately, whether Inheritance Tax is likely to be scrapped is yet to be seen, and the ongoing dialogue on this issue reflects the ongoing effort to find the right equilibrium between the competing interests at play.
FAQs
How much Inheritance Tax is due when you die?
Inheritance Tax is a tax which is paid on the value of assets held by an individual upon their death. The headline rate of Inheritance Tax is 40%, although in many cases it can be lower due to exemptions and reliefs available.
This means that the effective rate of Inheritance Tax payable on a deceased person’s estate is usually much lower than the 40% headline rate. Generally, the amount owing in inheritance tax will be determined by taking the combined value of all assets owned, less any liabilities (such as mortgages or credit card debt), then removing an allowance equal to the Nil Rate Band (NRB), which normally stands at £325,000 per person.
Finally, this figure is reduced further by any Residence Nil Rate Band (RNRB) allowance, which may provide up to £175,000 additional deduction if a home has been left to direct descendants. This RNRB allowance gradually reduces until it is fully tapered away when the total estate value exceeds £2 million.
Do all deaths equal an Inheritance Tax bill?
No, not all deaths result in Inheritance Tax being paid. The rate of Inheritance Tax, where applicable, will ultimately vary. The recent press coverage of Inheritance Tax has created an impression that it impacts a lot of taxpayers. However, the money raised from Inheritance Tax is insignificant in the scheme of total tax revenue. This can be seen as relatively few deaths result in Inheritance Tax being payable.
According to the most recent data available on Inheritance Tax liabilities, less than 6% of all deaths in 2020/21 would incur an inheritance charge. This figure was further decreased with the introduction of transferable Nil-Rate Bands and Residence Nil-Rate Bands to less than 4%. That is around 23,000 deaths that will have incurred an estate tax by this period. It is obvious, therefore, that Inheritance Tax does not apply to every death; though the majority of those affected are estates exceeding £325,000 in value or more.
What can we expect in the future when it comes to Inheritance Tax?
Current Inheritance Tax laws have been in place since 1986 as part of the Conservatives’ Taxation and Social Security Acts. In 2009, it was revealed that Inheritance Tax accounted for less than 1% of all UK government revenue, inspiring calls to scrap Inheritance Tax altogether. However, a closer analysis of how Inheritance Tax interacts with Capital Gains Tax (CGT) quickly reveals why this would be a difficult task.
Inheritance Tax and CGT are both taxes on transfers of wealth but have different rates and allowances that affect how they are applied differently. Inheritance Tax applies to transfers upon death, while CGT is charged on gifts or transfers made during lifetime. Broadly speaking, scrapping Inheritance Tax without making changes to CGT could lead to unintended consequences, such as unforeseen tax hikes or avoidance loopholes opened up by those with the expertise to exploit them. It is therefore likely that any calls for tax reform will need careful consideration before any new policies are implemented – particularly given the upcoming General Election, which could lead to significant changes in taxation policy.
