EDITOR'S LETTERMerryn Somerset Webb
Almost everyone hates inheritance tax. It is seen to be the worst of all the double taxations (all money is taxed over and over). It piles needless administration on to grief. It’s needlessly complicated (the newish residence nil-rate band being the last straw for many). It comes with enough loopholes that anyone who doesn’t find a way to avoid it feels like they aren’t trying hard enough to protect their wealth for their children, which keeps them up at night. It isn’t particularly fair. But possibly worst of all, the existence of inheritance tax creates a friction that slows the passage of money, businesses and land through the generations.
Those with money don’t understand the annual inheritance tax free gifting system – £250 here, £1,000 here and maybe no limit if your gifts are out of income. So they give less than they might. Those with businesses that aren’t liable to inheritance tax are given an incentive to hold on until death (to avoid paying capital-gains tax if they transfer when they are alive). It’s a mess – especially given that one thing the UK could really do with is a trickle down of wealth between the generations.
Good news then that the Office of Tax Simplification has produced a new report on how the inheritance tax system might be simplified. There are useful things in it. The idea that one simple (hopefully high!) annual allowance could replace all the silly little ones – and possibly the gifts out of income exemption – is sensible. A thought on dumping the seven-year rule and the taper within it (tapers are always a nightmare – see our blog at moneyweek.com for more on the chaos the pensions taper is causing) would work. The plan to look at the huge exemptions from inheritance tax for agricultural property and businesses is good too – if we want firms constantly to renew and rejuvenate, the current incentives aren’t quite right.
(One aside here for those who invest in Aim stocks with a view to avoiding inheritance tax, be careful. Right now if you hold an eligible Aim-listed stock for two years, it passes on inheritance tax free. This review will consider how the relief works. If it looks like it might be dropped or curtailed the [high] valuations of currently eligible stocks will fall – fast.)
But here’s the thing: all these things are just tinkering. Not awful tinkering – but really no more than tinkering. The UK needs more than that. In an ideal world we’d get a root-and-branch reform of the entire tax system. That’s not going to happen. But given that inheritance tax brings in only 1% of the total tax take, we could go for a full reboot, without really risking our tax base.
So why not abolish the entire thing and replace it with a gift tax on the recipients of unearned cash – wherever it comes from? It would be fair, progressive, unavoidable and, possibly best of all, low stress for the elderly (the tax becomes the recipient’s problem rather than theirs). Perfect. There’s more on this at moneyweek.com. However, you might also turn to our cover story. The rise of personalised medicine is about to revolutionise healthcare – and your ideas about how long you will live. Dying with enough cash that our estates are liable for IHT might not turn out to be much of a problem for most of us.
And lastly, a reminder – tickets for the MoneyWeek event on 22 November are now on sale. Don’t miss it – snap up your seat at moneyweekwealthsummit.co.uk.