It’s one of the most unpopular forms of tax in the country. Inheritance tax or IHT, is considered “unfit for purpose” by policymakers and taxpayers on both sides of the aisle. Considering the latest statistics from the government and the rising level of wealth inequality in Britain, the calls for a thorough overhaul of the system seem justified to some experts (Heather Stewart, the Guardian, 2 May 2018).
The tax is structured as a flat 40 per cent levy on assets worth over £325,000 left as inheritance. That threshold is much higher than the median household wealth across the UK. This means only 4% of estates pay the inheritance tax. In 2017/2018, collections rose to £5.3 billion for the first time, accounting for 77p in every £100 pounds collected in taxes throughout the fiscal year (Lucy Warwick-Ching, Financial Times, April 27, 2018)
According to the Resolution Foundation, there are numerous reasons this tax is considered unfair and unfit by regular taxpayers. Some view it as double taxation of assets from which HM Treasury has already taken its fair share. Others say there are simply too many loopholes in the current system that allow people to get away with paying less. Coupled with all the exemptions under the current system, an individual can inherit up to £900,000 without paying IHT (Delphine Strauss, Financial Times, MAY 2, 2018).
Instead, the Resolution Foundation (Press release, 2 May 2018) argues for a tax on gifts and bequests given out over a lifetime. According to the foundation’s research, this ‘Lifetime Receipts Tax’ could make the tax system fairer for everyone and raise the government’s tax revenue. A hypothetical 20% tax on gifts worth between £125,000 to £500,000 and 30% on gifts beyond that could help the government raise £11 billion by 2020-21, nearly double the amount under the current system.
Replacing the tax on inheritance to one on gifts given out over a lifetime could move the British system closer to the one implemented in France and Ireland. Whether or not the IHT should be reformed is still under review by the independent Office of Tax Simplification. Their report is due by the end of the year which means taxpayers can expect an overhaul relatively soon.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.