Inheritance tax should be abolished and replaced with a new system which would be fairer and harder to avoid, a report from think tank Resolution Foundation says.
The report states that inheritance tax is “unpopular and unfixable” and unfit for modern society, and therefore should be replaced by a new lifetime receipts tax with a much lower rate of £125,000.
Currently, the inheritance tax threshold stands at £325,000 per person, and anything above is subject to a 40% tax.
Inheritance tax is widely regarded as the most unpopular tax, with 59% of the public finding it unfair according to a YouGov poll. Despite this, the report says the tax has a “limited revenue raising ability”, affecting 4% of estates in the UK and contributing only 77p of every £100 of taxation, making it unfit for both the public and the government.
Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said that the current system “manages the uniquely bad twin feat of being both wildly unpopular and raising very little revenue.”
The report explains that inheritance tax is perceived as unfair because it is negatively seen as a “tax on the dead (rather than the living); on giving (rather than receiving); and as double taxation of those who have earned the wealth (rather than a tax on the income of the lucky recipients).”
Inheritances have doubled over the last 20 years, reaching over £100bn in 2015/16, and are forecast to double again over the next two decades.
However, the average age millennials are expected to receive their inheritance is 61, and so the system will perpetuate intergenerational unfairness.
As inheritance tax receipts are forecast to grow roughly less than a quarter as fast as inheritances, “more of the strain in responding to the UK’s ageing population and health needs must be picked up by other taxes, with clear implications for basic equity.”
Furthermore, it is seen as avoidable for the “rich and well-advised”, who pay less inheritance tax through the use of trusts, business property relief and agricultural relief.
Proposed lifetime receipts tax
The report proposes abolishing inheritance tax entirely because the unpopular elements of “ease of avoidance” and “taxing giving” are so fundamental to it.
The proposed lifetime receipts tax would see individuals given a lifetime receipts tax allowance of £125,000 (indexed to inflation), and would keep track of an individual’s cumulative receipts throughout their life, excluding gifts of £3,000 or less and with some other exceptions, such as transfers to spouses and charities.
Beyond a £125,000 lifetime receipts tax allowance, the report proposes a basic rate of 20% and a top rate of 30% for lifetime receipts over £500,000.
The report adds that moving away from being a “death tax” to capturing all lifetime gifts would reduce many of the current opportunities for avoidance, as currently individuals may give away substantial liquid assets more than seven years prior to their death – an option not available to those with limited wealth or wealth tied up in a single property.
Ultimately the tax would be levied on the beneficiaries of the inheritance rather than the givers, which has “both perceptual and practical benefits.” This “progressive recipient-based tax” would incentivise individuals to spread their wealth wider by encouraging them to bequeath to those who have not received large amounts before.
Resolution Foundation predicts that if this system were to be adopted in 2020/2021 it would bring in an estimated £11bn compared to inheritance tax’s projected £6bn.
The report suggests a series of measures to restrict business property relief and agricultural relief to small family businesses, such as by capping the value that can receive relief, increasing the minimum ownership period, clawing back the relief if the asset is sold soon after death, and introducing a “farmer test” and “business test”.
The report also recommends the removal of the tax-free treatment of pension pots inherited on deaths before 75, as well as the abolishment of forgiveness of capital gains tax on death, as it costs an estimated £1.2bn in 2018-19 and leads to assets being held onto until death to avoid tax.
The Office of Tax Simplification has published a call for evidence to gather information about people’s experiences and perceptions of inheritance tax. The consultation will close 8 June 2018.
This follows the Chancellor requesting a review into the labyrinthine system to ensure it is fit for purpose, with industry experts calling for examination of the residence nil rate band, taper relief and taxing trusts.