Tax the living, not the dead

Inheritance tax forms © Getty Images
Abolish inheritance tax and replace it with a gift tax

I’ve written here several times about how inheritance tax could be reformed – a subject I know is close to the hearts of many MoneyWeek readers.

One of my suggestions has been to abolish it completely and to replace it with a gift tax. This would mean taxing not the estate of the dead person, but the recipients of the cash, for whom it should considered unearned income (detail here). You could then tax it at the same rate as either earned income or as dividends, depending on which method created the least confusion/admin hell at HMRC.

This would, I think, have two happy effects. As the tax would be nothing to do with the estate, the elderly would know that avoiding it was not in their power, something I suspect would relieve them of a great deal of stress (MoneyWeek readers worry a lot about finding ways to avoid inheritance tax). It would also have an element of  progressiveness the current system does not have (the lower your income-tax band on receiving your gift the less you pay). Good isn’t it?

I’m pleased then to see that the Resolution Foundation’s Intergenerational Commission is now pushing a similar (if rather more complicated) idea. It would like to see what it calls a “Lifetime Receipts Tax”. Everyone would get a lifetime allowance for the receipt of cash/asset gifts (it suggests £125,000). Anything received beyond that would be then be taxed in bands – 20p in the pound up to £500,000 and 30p after that.

I like this idea – it takes the strain from the old (they can’t avoid it); it encourages a wider spread of wealth (the more people you leave your cash to the less tax is paid) and it’s not too tough (the marginal rate stays lower than it is now).

But I prefer my own idea for the simple reason that the very, very last thing the UK tax system needs now is yet another raft of tax bands and rates. It would also be quite hard to argue against – after all, it means that someone inheriting £500,000 would net a handy £425,000. But still, it is good to see some thinking at least going in the right direction.