TaxAdministrationIHT: where there’s a will …

IHT: where there’s a will ...

Inheritance tax is unfair and need an overhaul

Labour’s former transport secretary Stephen Byers’ call for inheritance tax
to be scrapped resulted in a firm negative response from the Treasury. Shadow
chancellor George Osborne has said that IHT is becoming ‘increasingly unfair’,
but declined to say his party would scrap it.

The Halifax bank’s response was to call for the IHT threshold to be raised to
£430,000, a proposal on which the government has so far failed to comment. But
while house prices continue to rocket, the issue for the average homeowner is
that after the death of a loved one they can end up facing a hefty demand from
the taxman.

Currently, 40% of anything left behind in an estate above the new £285,000
nil rate IHT threshold goes to the government. Despite the marginal rise in the
threshold earlier in the year, thousands more people will still have to pay IHT,
since house price inflation is running at a much higher level than the overall
inflation rate, and this allowance will simply not keep pace.

ACCA has called upon the government to overhaul the system with a view to
making the main residence exempt, therefore removing one of the great inequities
of the tax system and reducing the burden on ordinary taxpayers and their
families. The template for this exemption already exists under capital gains
tax, where the main residence is exempt from CGT.

As with other areas of tax, the rules on IHT can be complex, and many
taxpayers are obliged to engage in exhaustive tax planning in order to try to
minimise their liability. But even though the estate of each spouse is assessed
individually on death, the exemption of the first partner to die cannot simply
be rolled over to the surviving partner to double the exemption in respect of
the value of the joint estate.

This is simply unfair. If the government is determined to resist pressure to
abolish IHT altogether in relation to the main residence, how much more simple
it would be if the nil rate was made transferable.

Recently, the challenge of cutting IHT bills has been made tougher by the
closure of tax loopholes which allowed people to give away assets – houses,
paintings, boats – while retaining an ability to use them.

It is a good revenue stream for the government, so IHT looks set to stay. But
for how much longer can the collective calls for it to be changed or scrapped be
ignored?

Chas Roy Chowdhury is head of tax at ACCA

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